Next time may be different - BIS Aug. 5 market rout
A team of economists at the Bank of International Settlements took a close look at what caused the Aug. 5 market rout.
They found that nothing has really changed.
They found that despite the chaos, markets held up remarkably well. But investors might not be so lucky next time — and there almost certainly will be a next time.
As volatility recedes, traders have wasted no time rushing back into some of the same leveraged bets that contributed to the initial selloff, the BIS team said.
At the end of the day, nothing has really changed.
While the unwind of the Japanese yen carry trade initially received much of the blame — and rightly so — for driving the selloff, it wasn’t the only crowded strategy affected by the sudden wave of deleveraging that rocked markets. Stretched bets on stocks and options were also impacted.
They all had one thing in common: Traders had increasingly deployed more leverage to chase the momentum, egged on by a prolonged stretch of low volatility.
The first blow was struck as volatility climbed in late July and early August. Soon, the whole edifice crumbled.
As volatility spiked on Aug. 5, clearinghouses demanded traders put up more capital to cover their risk, which set off a vicious cycle of margin calls.
Joseph Adinolfi MarketWatch 28 August 2024
Börsen i Stockholm och New York 4-5 augusti 2024
https://englundmacro.blogspot.com/2024/08/borsen-i-stockholm-och-new-york-4-5.html
Börsen i Stockholm och New York 6 augusti 2024 - Market crashes usually have the same mechanism
https://englundmacro.blogspot.com/2024/08/borsen-i-stockholm-och-new-york-6.html
The market turbulence and carry trade unwind of August 2024
https://www.bis.org/publ/bisbull90.htm
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