Читать книгу The Foreign Exchange Matrix - Barbara Rockefeller - Страница 10

Risk aversion is a concept arising from economists in the insurance industry (later applied with great efficacy in designing lotteries). Academic work on this area includes measuring and modelling such things as the effect on absolute and relative risk aversion of a change in wealth. For example, a rich man fears losing 0.01% of his wealth more than a poor man fears losing 10% of his, which is one of the great mysteries of the human brain. Following the Lehman debacle in the autumn of 2008, the use of the concept of risk aversion to explain FX market behaviour was quickly adopted. Application of the concept to financial markets and especially FX quickly went viral and became universal within weeks.

In financial markets generally and the FX market in particular, we observe that players mostly act like the rich man – risk aversion starts out high and goes higher as a one-time specific threat to wealth appears. The Lehman Brothers bankruptcy was a spectacular example of a variable outside the usual scope of the FX market that became internal to the FX market through the transmission mechanism of short-term interest rates. The perception of excessive riskiness in the interbank lending market morphed in to a perception of excessive riskiness in the euro/dollar currency market. Risk aversion is what they have in common – it’s a force through which price actions are produced.

As liquidity dried up and interbank lending tapered off to a trickle everywhere in the world, the US 4-week bank discount rate shifted from 1.92% at the beginning of June to 1.35% on 12 September – and 0.28% on 15 September, the date of the Lehman bankruptcy announcement. By year-end 2008, it was 0.11%. Yields fell all along the curve, too. The yield on the 10-year note was 4.324% on 13 June and dipped to 3.25% on 16 September. It bottomed near year-end at 2.038% on 18 December 2008. Around the same time, the euro fell from 1.5948 on 16 July 2008 to 1.2738 on 22 October 2008.

The drop in return reflects a massive safe-haven inflow to the dollar that violates the usual rule that currency follows yield. In other words, if all other things are equal, we expect a currency to fall if its yield is falling, especially the after-inflation, real yield. In 2008, investors were happy to get return of capital and never mind return on capital. The Treasury’s report on capital flows bears out this thesis. The net capital flow to the US, including Treasuries, Agencies and equities, rose from $14.76 billion in August 2008 to $59.10 billion in September. This is risk aversion in action.

It’s probably fair to say that risk appetite/risk aversion were known for decades under a different name: greed and fear. But whereas greed and fear arise from personal emotions that overcome rational cognition, risk aversion is entirely rational. The new flat world of international finance consists of players who recognise shocks and events outside their own securities’ factor set as capable of jumping barriers into their own factor set. In a sense, all factors, however exogenous-seeming, are potentially endogenous, and that’s not even counting unknown factors.

It’s not only the FX market that sees this effect. In US equities, after a 40-year delay, securities analysts started to acknowledge that multinational corporation earnings are influenced by FX rates; they were forced to start accounting for the FX effect of overseas earnings along with less difficult things like cash flow, EBITA and book value.