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Correlation, Crowding and Convexity

Alpha Exchange

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The Impact of Low Rates and Market Prices on Margin of Safety

Low rates, low vol, and low credit spreads contribute to low compensation for bearing risk. The pre-GFC build-up showed that levels of risk premium can quickly disappear, as seen in late 2017. The concept of tapering bond purchases in 2013 led to a marked shift in rates. When market prices offer little margin of safety, repricing can be rapid. This was evident in the sell-off of the Indian rupiah in 2013. Additionally, investor reaction plays a crucial role in market risk events, where leverage and exposure can lead to forced selling or hedge rebalancing.

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