For the life of me I can’t get this stuff down. The two topic test I bombed on.
Anyhow have some good notes/explinations.
Here is what I “think” I know
Edit: I’m really bad at sector roation, and the yield curve stuff/trades.
Anyhow have some good notes/explinations.
Here is what I “think” I know
- The greater growth prospects, the greater real rate of interest, due to marginal consumption in future being low.
- Bond less than Intertemporal Rate of Sub, Buy bond
- Bond greater than ITRS, sell bond
- For risk adverse investors, the Correlation between Price and ITRS is negative, adding to a risk premium.
- If something is a good consumption hedge, it’s price will be higher now and it’s possible it’s require rate of return is less than the nominal rate.
- Short term rates are positively correlated with both GDP growth and GDP Vol.
- A short term default free bond has Real rate + inflation
- A long term default free bond has a Real Rate + inflation + inflation uncertaintly premium.
- The breakeven interest rate = Exepected Inflation and Inflation Uncertainty.
- Bonds that aren’t default free have credit risk, they are not good hedges of future consumption.(not 100%)
- Bonds with credit risk tend to outperform when the makret is good and underperform when it sucks.
- Equity has an addtional Equity risk premium.
- Equity is positively correlated to earnings, which are correlated to GDP. Hence, poor consumption hedge.
- Earnings are positively correlated to GDP growth and when rates decline.
- Commerical Real esate has both bond features, equity features, and an illiqudity premium.
- Commercial real estate is not a good consumption hedge.
- Taylor policy, sets a central bank rate based on the neutral rate and other things.
- If yield curve upward sloping, inflation and GDP growth expected to be high.
- If it’s inverted, recession predicted.
Edit: I’m really bad at sector roation, and the yield curve stuff/trades.
