Friday, June 09, 2006

Risk Aversion, Alpha and Credit Derivatives

Raghuram G. Rajan, Economic Counselor and Director of Research, International Monetary Fund describes what he sees driving risk aversion in today’s market. He highlights four types of behaviors—risk shifting, illiquidity seeking, tail risk seeking, and herding which are amplified and appear to be risk tolerance when interest rates are low. Reversals in these behaviors, as monetary policy tightens, now appear to be risk aversion.
Also, some thought provoking comments on alpha, poor man's alpha, and accidents waiting to happen in credit derivatives.

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