We use relative value to measure limits to arbitrage in fixed-income markets. Relative value captures apparent deviations from no-arbitrage relationships. It is simple, intuitive and can be computed model-free for any bond.
While greater global financial integration is beneficial, the authors discuss how foreign capital inflows can also facilitate the buildup of domestic vulnerabilities and potentially lead to destabilizing reversals. Canada’s current international investment position is typical of advanced economies and will likely continue to act as an economic stabilizer. However, the growth and composition of Canada’s international investment position warrant continued monitoring.
This analytical note examines how much of the systematic variation in the Canadian dollar is attributable to its sensitivity to commodity prices. We introduce a new “oil” portfolio that captures systematic variations when the exchange rates of commodity exporters and commodity importers move in opposite directions.
In this analytical note we show that the share of the systematic variations in the Canadian dollar has risen significantly in the past two decades. Systematic variations in the exchange rate are shared with other currencies. This parallels the equity market, where variations in the price of a given stock are shared with variations in the prices of other stocks.