
Correlation, Crowding and Convexity
Alpha Exchange
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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