Here they are — two examples of risk-free and profitable trades (really) courtesy of the Bank of England’s financial stability guru, Andrew Haldane.
It’s just a shame no one bothered to exploit them:
The first one is the difference between an index of CDS contracts and and a self-built portfolio of the same CDS contracts. From October 2008 onwards, the values of the two diverged by as much as 60bps. Even with transaction costs taken into account, the divergence persisted.
The second chart shows the difference between two pretty much identical money market bets — forward rate agreement spreads and forward rates implied by the Libor spreads, both of the same maturity. Over the same period, these differed by as much as 250bps.
Where were the canny arbitrageurs to sniff out these potentially riskless trades?
And perhaps more importantly, why is Haldane highlighting them?
Here’s what he says on the first point:
So why were the bets not placed and the arbitrage opportunities exploited? First, money is needed to place even a riskless bet. That was the scarcest of commodities after the failure of Lehman Brothers in October 2008. Second, placing a bet also requires a trustworthy bookmaker. They too were thin on the ground in the midst of crisis. In their absence, arbitrage may be more “apparent” than real. Market prices are likely to deviate from fundamentals due to liquidity and counterparty premia.
And on the second point — the above are examples of Efficient Markets Hypothesis gone awry, and Haldane presents them in a paper all about the hot-button issues of fair value and accounting reform.
The point is that if EMH was true all the time, there’d be no reason to debate the need for mark-to-market accounting — the prices at which assets are accounted for would be identical to their real value.
As it is though, you get situations like the above.
The whole paper is worth a read, but here’s something which also struck us:
It is interesting that there was evidence of financial markets making their own switch in valuation convention during the course of the crisis. As funding maturities shortened, the probability of asset liquidation rose. It became rational, then, for investors to begin valuing even banking book assets at market prices, as in Chart 7. For a time, this process appeared to generate its own downward dynamic, with shortening maturities and falling asset prices eroding the impliedly mark-to-market solvency position of banks in a liquidity/solvency loop. Some have argued this downward dynamic itself justifies switching-off fair values. But the perils of doing so are clear. Persisting with an inappropriate valuation metric may give an inaccurate picture of banks’ true solvency position. It will also reduce banks’ incentives to adjust funding structures to guard against such a dynamic. It is precisely such risk management incentives that appear to explain the relative success of some firms, including Goldman Sachs, during this crisis. Therein may lie a lesson.
In other words liabilities — not just assets — also matter when it comes to the mark-to-market debate.
And who’s most likely to show asset-liability (maturity) mismatches?
The banks.
Related links:
Banks don’t just have an asset problem… - FT Alphaville
A smooth IASB and an impairment change – FT Alphaville
Good news for banks, IAS 39 edition – FT Alphaville
沒有留言:
張貼留言