Causes of Trend Breaks in Interest Rate Developments
Rik Klerkx's research focuses on understanding regimes, trend breaks, and scenarios in fixed-income markets. Despite over two centuries of observed data, investors remain uncertain about which process precisely determines prices. Since the underlying process can change unexpectedly, predictions in financial markets are often unreliable. Klerkx, therefore, investigates how these processes evolve, particularly by examining different historical periods (regimes) where the dynamics are similar. These regimes are characterized by trend breaks, for example, due to leadership changes or the use of less conventional measures, such as large-scale monetary injections into the economy by central banks.
A key finding is that changes in long-term interest rates can have both external and internal causes. They may arise from the dynamics and behavior of market participants themselves, leading to unexpected movements in the markets. Additionally, Klerkx advocates for the use of story-based scenarios to better manage uncertainty. By creating scenarios that account for potential trend breaks, investors can better prepare for future developments.
This research is relevant for policymakers, regulators, and investors, such as pension funds, who operate in an environment of constant uncertainty. The use of scenarios provides them with a way to better handle unexpected changes, such as interest rate cuts, and helps optimize fixed-income portfolios.
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