A collection of our white papers and peer-reviewed research articles related to macro / multi-asset investor behavior, hedging, risk regimes, liquidity risk, private assets, portfolio construction, and more.
By Mark Kritzman, Cel Kulasekaran, and David Turkington.
We introduce a more flexible way to forecast risk and return based on the most relevant historical periods.
As economic regimes shift, investors who choose to adapt must build portfolios that match their evolving view of the future. Forecasts of asset risk and return should account for regime-specific trends. The question is how to implement this idea in practice. Typically, an analyst will find every time an economic indicator like inflation or growth was above (or below) a fixed threshold, and she will pay equal attention to every data point that qualifies. While this approach seems sensible, it also has dramatic limitations. Ideally, we should recognize that the regime labels of past events are not simple yes/no answers; they are ambiguous. We should pay more attention to some past events than others, based on their relevance. We should weigh the impact of many variables rather than just one. And we should accept that some events are relevant to more than one regime. A statistical measure of relevance, based on the Mahalanobis distance, empowers investors to analyze these nuances of regimes with rigor. We show how to estimate expected risk and return as weighted averages of the relevant past, and how these forecasts of asset performance lead to intuitive portfolios optimized for a range of possible regimes.
By Alberto Cavallo, Megan Czasonis, William Kinlaw, and David Turkington
We show how unstructured price data from online retailers can anticipate inflation shifts and enable investors to hedge inflation risk dynamically.
Investors and academics have been studying inflation, and how it affects asset prices, for more than four decades. Their findings are discouraging: there just aren’t many assets that offer a reliable hedge against inflation. Treasury Inflation Protected Securities (TIPS), introduced in 1997, represent the only U.S. asset class whose returns are linked explicitly to inflation, but they have drawbacks. For one, their yields are lower than normal treasury bonds during most periods, when inflation is low. In an ideal world, investors would capture the higher yield of treasuries when inflation is benign and shift into TIPS to capture their price appreciation when inflation expectations rise. To do this, they need a good leading indicator of the market’s collective inflation expectations. In this paper, we show how unstructured price data from online retailers, spanning millions of products captured by PriceStats®, can be used to forecast the relative performance of TIPS and treasuries.
By Musa Amadeus, Rajeev Bhargava, Michael Guidi, Marvin Loh, Gideon Ozik, and Ronnie Sadka
Read between the lines: The measurement of Fed members’ monetary tones facilitates an understanding of the dynamics of the individual monetary policy stances underlying aggregated, consensus (top-down) Fed tones.
Amadeus et al. (2022) observe that aggregated, consensus (top-down) central bank monetary tones in media contain predictive information pertaining to future weekly yield fluctuations. This article elucidates the more granular, stratified (bottom-up) dynamics underlying these relations. The predictive relationships between Fed consensus tones and yields are primarily driven by an underreaction of yields to the Fed Board of Governors’ tones between monetary policy meetings. Over short-term horizons, Treasury yields appear to price voting FOMC members’ (Board of Governors’ and Regional Bank Presidents’) tones while relatively longer-term horizon yields appear to reflect both voting and non-voting tones. Fed Regional Bank Presidents’ monetary tones are more responsive to regional inflation fluctuations than to unemployment. The analysis of the heterogeneous impacts of Fed members’ tones over distinct yield horizons provides insights pertaining to the pricing of voting and non-voting Fed members’ tones in Treasury markets.
By Megan Czasonis, Mark Kritzman, and David Turkington
Relevance-based prediction is a new approach to data-driven forecasting that serves as a favorable alternative to both linear regression analysis and machine learning. It follows from two seminal scientific innovations: Prasanta Mahalanobis’ distance measure and Claude Shannon’s information theory. Relevance-based prediction rests on three key tenets:
1) relevance, which measures the importance of an observation to a prediction;
2) fit, which measures the reliability of each individual prediction task;
3) codependence, which holds that the choice of observations and predictive variables should be determined jointly for each individual prediction task
By William Kinlaw, Mark Kritzman, Michael Metcalfe, and David Turkington
We use novel statistical techniques to measure the time-varying influence of cost push, demand pull, inflation expectations, monetary policy, and fiscal policy on inflation regimes.
It can be hard to pin down what causes inflation, and often a range of views are put forth. The shifting nature of inflation regimes makes this challenge even more daunting. In our latest research we take a data-driven view of the key drivers of inflation, comparing the economic circumstances at any point in time to those that prevail during various historical regimes. We identify four prototypical inflation regimes: stable, rising steady, rising volatile, and disinflation. And we apply a method originally introduced for predicting the business cycle to disentangle and attribute the determinants of U.S. inflation to eight macroeconomic variables. The results are intuitive and carry interesting policy implications. As of early 2022, fiscal spending stands out as the main determinant of the current inflation regime.
By William Kinlaw, Mark Kritzman, and David Turkington
Conventional statistics hide important realities that investors need to know.
The correlation coefficient often fails to capture what really matters to investors. There are two reasons for this. First, investors often measure correlations using monthly data and assume that they also hold over one-year, five-year or ten-year periods. Unfortunately, in the real world, they often don’t. The second reason has to do with a fundamental misconception about diversification. The fact is, investors don’t always want it. Sure, they want it on the downside, in order to offset the poor performance of one or more assets. But on the upside they prefer all assets to rise in unison, which is the opposite of diversification. Put differently, they’d be happy to place their eggs, conveniently, in a single basket provided nobody steals it. Our research shows that correlations can vary through time based on a range of conditions including the level of interest rates, the degree of turbulence in financial markets, and the performance of major equity markets. Overall, our findings challenge the notion that returns evolve as a simple “random walk,” a critical pre-condition without which we must interpret the correlation coefficient distrustfully. To address these issues, we introduce the notion of co-occurrence and offer a new perspective on how investors should diversify portfolios.
2023 State Street Foundations of Investing Seminar Series
This year we reviewed the fundamentals of finance and investing! Even the most sophisticated investors can benefit from an occasional tune-up. For our third annual State Street Foundations of Investing Seminar Series, our team of academic and industry experts went back to basics, covering the core principles of modern investing.
Connecting theory to practice, our Global Markets research experts and academic partners covered topics such as inflation, liquidity, private markets, and much more. Check back here for the replay videos when they become available.
Thursday, June 29th 2023 at 9:00am HKT
How Carbon Emissions Connect to Investing
George Serafeim, Harvard Business School (bio) | REPLAY AVAILABLE
Presenting a framework on how carbon emissions link to growth, risk, and valuation across different sectors of the economy.
Thursday, July 13th 2023 at 9:00am HKT
The Prospects For and Implications of Chinese Financial Liberalization
Dwyfor Evans and Yuting Shao (bio), State Street Macro Strategy | REPLAY AVAILABLE
Currency control has been a hallmark of Chinese economic policy. However, as economic development matures, the need to foster internal capital markets, policy orthodoxy and, ultimately, liberalize the capital account amid the broader prospects for renminbi internationalization becomes more pressing. We take a close look at monetary policy and interest rate liberalization over the years, including the growth of the offshore market that has enabled China to experiment with reforms. Its commitment and timing around further liberalization remains a matter of conjecture, beyond the limited scope of ‘Connect’ programs tied to Hong Kong. As China’s economic and political influence expands, how will Chinese authorities balance their competing priorities, such as: gaining access to international markets, implementing monetary policy reforms and maintaining institutional stability? Meanwhile, how should institutional investors position themselves in Chinese asset markets and navigate through the economic and financial risks that ensue?
Thursday, July 20th 2023 at 9:00am HKT
Relevance-Based Prediction
Mark Kritzman, MIT Sloan School of Management (bio) | REPLAY AVAILABLE
This presentation describes a new mathematical system for predicting future outcomes based on a statistical concept called relevance, which gives a mathematically precise and theoretically justified measure of the importance of an observation to a prediction. It also describes fit, which measures a specific prediction’s reliability, thereby offering guidance about how committed one should be to its predictions. And it shows how fit identifies the uniquely optimal combination of observations and predictive variables for each individual prediction task. This new relevance-based prediction system addresses complexities that are beyond the capacity of conventional prediction models, but in a way that is more transparent, more flexible, and less arbitrary than widely used machine learning algorithms.
Thursday, July 27th 2023 at 9:00am HKT
Narrative Economics in Practice
Gideon Ozik, MKT MediaStats (bio) | REPLAY AVAILABLE
Empirical measures of narratives can help investors quantify attention to stories and in turn, enhance portfolio returns. The summer session will discuss how media-derived measures of narratives can explain market-wide moves and how investors may use such measures to assess portfolio exposures to (otherwise) intangible risks.
We will examine specific applications of narrative economics to improve portfolio and risk management processes using a variety of narratives including inflation, escalation of nuclear tensions and civil unrest. We will then discuss how narrative-conscious strategies may improve stress scenario analysis and asset allocation. Finally, we will review methods by which investors may gain or hedge financial exposure to emerging themes by constructing portfolios of narrative-sensitive assets.
Thursday, August 3rd 2023 at 9:00am HKT
An Overview of Private Markets Investing
Josh Lerner, Harvard Business School (bio) | REPLAY AVAILABLE
After a historic boom leading into 2022, the private market now sits at an inflection point. Uncertainty is high, making investors' job of navigating the current private market landscape difficult. In this lecture, Harvard Business School professor Josh Lerner will discuss the major factors to consider when investing in today's market conditions. Professor Lerner will give insight on the drivers of the historic private equity (PE) boom, current trends that are impacting the direction of the market, and secular shifts that will influence the long-term outlook of PE. The content will draw from a combination of academic research, industry data, and expert insights to provide a 360-degree view of the market landscape. From this lecture, investors will develop a backdrop for positioning themselves for success amidst present and future market dynamics.
Thursday, August 10th 2023 at 9:00am HKT
Defining and Measuring Inflation
Alberto Cavallo, Harvard Business School (bio) | REPLAY AVAILABLE
As the global economy reemerges from the global COVID-19 pandemic and central banks raise interest rates to contain prices, inflation risk looms large in the minds of investors. In this session, Alberto Cavallo — the Edgerley Family Professor at Harvard Business School, co-founder of PriceStats, and member of the Technical Advisory Committee of the U.S. Bureau of Labor Statistics (BLS) — will discuss the fundamentals of how inflation is measured, what drives it, and how to think about the risk to investors in 2023.
Thursday, August 17th 2023 at 9:00am HKT
How Behavioral Biases Impact Markets
Alex Cheema-Fox, State Street Associates (bio) | REPLAY AVAILABLE
Sophisticated investors have long recognized that market participants are not always 100 percent rational and that behavioral biases and trends can influence markets. It is essential that investors learn to recognize these patterns — both in themselves and the markets at large — as well as how to measure and account for them when managing portfolios. In this session, Alex Cheema-Fox, Head of Investor Behavior Research at State Street Associates — reviews key principles of behavioral finance with a practical focus on implications for investment management.
Thursday, August 24th 2023 at 9:00am HKT
Central Banking Strategies and Challenges
Robin Greenwood, Harvard Business School (bio) | REPLAY AVAILABLE
In an increasingly interconnected world, it is impossible to succeed as an investor without a firm grasp on economic fundamentals and policy levers. In this session, Robin Greenwood — the George Gund Professor of Finance — will review the fundamental tenets of central banking with a focus on the main questions global investors should be thinking about in 2023.
Thursday, August 31st 2023 at 9:00am HKT
Currency Hedging and Currency Factors
David Turkington and Megan Czasonis, State Street Associates (bio) | REPLAY AVAILABLE
When investors seek returns in foreign markets, they inevitably gain exposure to currency risk. Efficiently managing this risk and turning it into an opportunity to enhance performance requires a well-defined currency process. In this presentation, Megan Czasonis (Head of Portfolio Management Research at State Street Associates) and David Turkington (Head of State Street Associates) will discuss how to approach currency hedging, first from the perspective of managing risk, and second from the perspective of generating active returns. In doing so, they’ll discuss how to balance the risk and diversification properties of foreign currencies, show how factors — both traditional and new — can explain currency moves, and identify which factors have worked well lately and which have broken down.
2023 State Street Summer Sessions Webinar Series
This summer we reviewed the fundamentals of finance and investing! Even the most sophisticated investors can benefit from an occasional tune-up. For our third annual State Street Summer Sessions, our team of academic and industry experts went back to basics, covering the core principles of modern investing.
Connecting theory to practice, our Global Markets research experts and academic partners covered topics such as inflation, liquidity, private markets, and much more. Replay videos are starting to get added, so check back here for updates!
CPE credit is offered for those who are CFA charterholders. You can earn 1 hour of credit for attending an hour long Summer Session. To qualify, you must attend the webinar in its entirety, answer the three polling questions throughout the webinar, and submit the Credit Request Form. Please reach out to Insights@StateStreet.com to request your form. We will also send out the form after the webinar. You must specify which session you are requesting credit for.
To view our APAC Region Foundations of Investing Seminar Series, click here.
Thursday June 15, 2023
11 a.m. EST
How Carbon Emissions Connect to Investing
George Serafeim, Harvard Business School (bio) | REPLAY AVAILABLE
Presenting a framework on how carbon emissions link to growth, risk, and valuation across different sectors of the economy.
Tuesday June 20, 2023
9 a.m. EST
Understanding Market Liquidity
Ronnie Sadka, Boston College Carroll School of Management (bio) | REPLAY AVAILABLE
Despite having been a key determinant of asset prices for decades, liquidity is still a difficult concept to define and properly understand. In this session, we shall review the theoretical economic underpinnings of market liquidity, and discuss its multi-faceted role in determining market prices and investment strategies. Alternative measures will be introduced as well as practical applications. Further attention will be devoted to the impact of recent market trends, such as retail trading and social media on market liquidity.
Thursday June 22, 2023
10 a.m. EST
How Behavioral Biases Impact Markets
Alex Cheema-Fox, State Street Associates (bio) | REPLAY AVAILABLE
Sophisticated investors have long recognized that market participants are not always 100 percent rational and that behavioral biases and trends can influence markets. It is essential that investors learn to recognize these patterns — both in themselves and the markets at large — as well as how to measure and account for them when managing portfolios. In this session, Alex Cheema-Fox, Head of Investor Behavior Research at State Street Associates — reviews key principles of behavioral finance with a practical focus on implications for investment management.
Thursday June 29, 2023
9 a.m. EST
An Overview of Private Markets Investing
Josh Lerner, Harvard Business School (bio) | REPLAY AVAILABLE
After a historic boom leading into 2022, the private market now sits at an inflection point. Uncertainty is high, making investors' job of navigating the current private market landscape difficult. In this lecture, Harvard Business School professor Josh Lerner will discuss the major factors to consider when investing in today's market conditions. Professor Lerner will give insight on the drivers of the historic private equity (PE) boom, current trends that are impacting the direction of the market, and secular shifts that will influence the long-term outlook of PE. The content will draw from a combination of academic research, industry data, and expert insights to provide a 360-degree view of the market landscape. From this lecture, investors will develop a backdrop for positioning themselves for success amidst present and future market dynamics.
Tuesday July 11, 2023
11 a.m. EST
The Limits of Diversification
Will Kinlaw, State Street Associates (bio) | REPLAY AVAILABLE
To diversify is one of the fundamental tenets of investing. Yet what seems straightforward in theory is complex in practice. Correlations can be asymmetric and unstable through time. Moreover, correlations measured over shorter intervals do not necessarily extrapolate to longer intervals. This presentation will synthesize more than 10 years of published research into these questions, analyze the challenge from a new perspective, and propose actionable solutions to help investors construct more resilient portfolios.
Thursday July 13, 2023
9 a.m. EST
The Prospects For and Implications of Chinese Financial Liberalization
Dwyfor Evans and Yuting Shao (bio), State Street Macro Strategy | REPLAY AVAILABLE
Currency control has been a hallmark of Chinese economic policy. However, as economic development matures, the need to foster internal capital markets, policy orthodoxy and, ultimately, liberalize the capital account amid the broader prospects for renminbi internationalization becomes more pressing. We take a close look at monetary policy and interest rate liberalization over the years, including the growth of the offshore market that has enabled China to experiment with reforms. Its commitment and timing around further liberalization remains a matter of conjecture, beyond the limited scope of ‘Connect’ programs tied to Hong Kong. As China’s economic and political influence expands, how will Chinese authorities balance their competing priorities, such as: gaining access to international markets, implementing monetary policy reforms and maintaining institutional stability? Meanwhile, how should institutional investors position themselves in Chinese asset markets and navigate through the economic and financial risks that ensue?
Tuesday July 18, 2023
9 a.m. EST
Introduction to Exchange Rates, Overshoots in Theory and in Practice
Michael Metcalfe, State Street Macro Strategy (bio) | REPLAY AVAILABLE
Exchange rates are fundamentally crucial for inflation, growth and international portfolios, as well as the cost of your summer vacation. Yet even though they are one of the deepest and most liquid financial markets, they remain one of the hardest to value and (sometimes) to understand. While theory suggests that exchange rates should calibrate around interest rate differentials or equalizing the prices of internationally tradeable goods or a broader set of equilibriums that produce internal and external balances in an economy. In practice, exchange rates are able to deviate substantially from such theoretical constructs as they jump between different macro drivers. With reference to ongoing correction of the US dollar’s overshoot that is being seen in 2023, we offer a guide as to how currency investment processes aim to cope with such an unruly asset class.
Thursday July 20, 2023
10 a.m. EST
Relevance-Based Prediction
Mark Kritzman, MIT Sloan School of Management (bio) | REPLAY AVAILABLE
This presentation describes a new mathematical system for predicting future outcomes based on a statistical concept called relevance, which gives a mathematically precise and theoretically justified measure of the importance of an observation to a prediction. It also describes fit, which measures a specific prediction’s reliability, thereby offering guidance about how committed one should be to its predictions. And it shows how fit identifies the uniquely optimal combination of observations and predictive variables for each individual prediction task. This new relevance-based prediction system addresses complexities that are beyond the capacity of conventional prediction models, but in a way that is more transparent, more flexible, and less arbitrary than widely used machine learning algorithms.
Tuesday July 25, 2023
11 a.m. EST
Introduction to FX Options
Tim Graf, State Street Macro Strategy (bio) | REPLAY AVAILABLE
Derivative markets are one of the many drivers of spot markets for foreign currencies, but their effects are often underappreciated. In this session, Tim Graf provides a brief overview of FX option basics and focus on how flows related to option hedging can drive currency movements.
Thursday July 27, 2023
9 a.m. EST
Narrative Economics in Practice
Gideon Ozik, MKT MediaStats (bio) | REPLAY AVAILABLE
Empirical measures of narratives can help investors quantify attention to stories and in turn, enhance portfolio returns. The summer session will discuss how media-derived measures of narratives can explain market-wide moves and how investors may use such measures to assess portfolio exposures to (otherwise) intangible risks.
We will examine specific applications of narrative economics to improve portfolio and risk management processes using a variety of narratives including inflation, escalation of nuclear tensions and civil unrest. We will then discuss how narrative-conscious strategies may improve stress scenario analysis and asset allocation. Finally, we will review methods by which investors may gain or hedge financial exposure to emerging themes by constructing portfolios of narrative-sensitive assets.
Tuesday August 8, 2023
9 a.m. EST
DeFi: Important Lessons and the Path Ahead
Antoinette Schoar, MIT Sloan School of Management (bio) | REPLAY AVAILABLE
The fast-growing decentralized finance (DeFi) system aims to build a new financial architecture that does not rely on traditional intermediaries and reduces rents in the financial sector, but recent events have shown that it also generates formidable challenges for market participants and regulators. This talk discusses the mechanics behind DeFi and lays out potential risks and benefits of this new architecture using forensic analysis from the Terra Luna crash.
Thursday August 10, 2023
10 a.m. EST
Defining and Measuring Inflation
Alberto Cavallo, Harvard Business School (bio) | REPLAY AVAILABLE
As the global economy reemerges from the global COVID-19 pandemic and central banks raise interest rates to contain prices, inflation risk looms large in the minds of investors. In this session, Alberto Cavallo — the Edgerley Family Professor at Harvard Business School, co-founder of PriceStats, and member of the Technical Advisory Committee of the U.S. Bureau of Labor Statistics (BLS) — will discuss the fundamentals of how inflation is measured, what drives it, and how to think about the risk to investors in 2023.
Tuesday August 15, 2023
9 a.m. EST
Interpretable Machine Learning for Investing
Andrew Li, State Street Associates (bio) | REPLAY AVAILABLE
Machine learning brings exciting opportunities to investing as advanced models that process complex nonlinearity and interaction patterns are powerful for statistical predictions. Machine learning for investing also faces challenges that differ from other disciplines where machine learning has excelled. The most challenging aspect is the black box problem — the lack of trust and transparency in understanding the models. In this summer session we will discuss both the opportunities and challenges when it comes to applying machine learning to investing, and our solution that allows human users to understand how a machine learning model arrives at a prediction.
Tuesday August 22, 2023
11 a.m. EST
Currency Hedging and Currency Factors
David Turkington and Megan Czasonis, State Street Associates (bio) | REPLAY AVAILABLE
When investors seek returns in foreign markets, they inevitably gain exposure to currency risk. Efficiently managing this risk and turning it into an opportunity to enhance performance requires a well-defined currency process. In this presentation, Megan Czasonis (Head of Portfolio Management Research at State Street Associates) and David Turkington (Head of State Street Associates) will discuss how to approach currency hedging, first from the perspective of managing risk, and second from the perspective of generating active returns. In doing so, they’ll discuss how to balance the risk and diversification properties of foreign currencies, show how factors — both traditional and new — can explain currency moves, and identify which factors have worked well lately and which have broken down.
Thursday, August 24, 2023
11 a.m. EST
Central Banking Strategies and Challenges
Robin Greenwood, Harvard Business School (bio) | REPLAY AVAILABLE
In an increasingly interconnected world, it is impossible to succeed as an investor without a firm grasp on economic fundamentals and policy levers. In this session, Robin Greenwood — the George Gund Professor of Finance — will review the fundamental tenets of central banking with a focus on the main questions global investors should be thinking about in 2023.
By Megan Czasonis, Mark Kritzman, and David Turkington
We measure investment returns based on the passage of meaningful events rather than just counting the days.
From a calendar perspective, every day or month is the same as any other day or month. However, from an event perspective, some periods are more meaningful than others. For example, we arguably experienced more in the Covid-induced upheaval of March 2020 than we do in most years. For investors, meaningful events are important, because they may cause asset prices to change. Based on this intuition, we explore the implications of measuring asset performance over periods with equal event intensity, a new clock that we call event time. Compared to traditional calendar returns, we find that event returns are better behaved in two key ways: (1) individual asset returns more closely resemble normal distributions and (2) co-movements between asset returns are more stable. These enhanced properties can help investors improve stress testing, performance evaluation, portfolio construction, and more.
By Mark Kritzman, Cel Kulasekaran, and David Turkington.
We introduce a more flexible way to forecast risk and return based on the most relevant historical periods.
As economic regimes shift, investors who choose to adapt must build portfolios that match their evolving view of the future. Forecasts of asset risk and return should account for regime-specific trends. The question is how to implement this idea in practice. Typically, an analyst will find every time an economic indicator like inflation or growth was above (or below) a fixed threshold, and she will pay equal attention to every data point that qualifies. While this approach seems sensible, it also has dramatic limitations. Ideally, we should recognize that the regime labels of past events are not simple yes/no answers; they are ambiguous. We should pay more attention to some past events than others, based on their relevance. We should weigh the impact of many variables rather than just one. And we should accept that some events are relevant to more than one regime. A statistical measure of relevance, based on the Mahalanobis distance, empowers investors to analyze these nuances of regimes with rigor. We show how to estimate expected risk and return as weighted averages of the relevant past, and how these forecasts of asset performance lead to intuitive portfolios optimized for a range of possible regimes.