In a recent post, my co-author and I showed some charts suggesting that investors have been accepting less compensation for bearing credit risk. This type of risk can be very costly when it materialises, but the probability of that happening is typically very low. A similar risk is inherent in deeply out-of-the-money options. Here too, investors seem to be accepting less compensation for risk.
Continue reading “Bitesize: Premium Delirium II”
Harry Goodacre and Nicholas Vause
Earlier this year, a number of financial market participants, commentators and regulators suggested that investors have been accepting less compensation for bearing given amounts of credit risk. This short post presents two charts in support of that view.
Continue reading “Bitesize: Premium Delirium”
Rational and behavioural factors can coexist in financial markets. The ‘search for yield’ (or ‘reach for yield’) observed in financial markets in recent years is a striking manifestation of the interaction of rational and behavioural factors. During an extended period of low interest rates and volatility, market participants have displayed a tendency to seek higher returns by investing in securities that carry higher credit, liquidity or duration risk. This tendency to search for yield appears to have been motivated by a mix of rational fundamental considerations, business and regulatory constraints, and behavioural biases.
Continue reading “Rational and Behavioural Drivers of Financial Markets: the case of ‘search for yield’”