Liquidity Cascades
Flirting with Models
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A Market Held Aloft on the Back of Central Banks
The ability to transmit policy via monetary easing is explicitly acknowledged by the fed, and is referred to as the recruitment channel. The impact of investors moving up the risk curve can be measured in the reflexive distortions they make in doing so. An investor seeking to achieve a seven point five % return must now take nearly three times the risk, as measured in standard deviation, compared to an investor in 19 95. Ironically, increased demand for higher risk assets may reflexively reduce risk premia, forcing investors even further out on the risk curve.
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