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GDP growth can be decomposed into two main parts: labor input growth and labor productivity growth. Labor input includes the size of the working population and how much they work—both…
Exogenous shocks come from outside the normal economic cycle and can either raise or lower a country’s long-term growth potential. Key types include: Policy changes: Pro-growth policies (like tax reform…
Forecasting trend growth is difficult because, although it's based on long-term averages, the growth rate itself is not fixed. Some drivers, like aging populations, change slowly and predictably. Others, like…
Understanding these relationships helps analysts predict how changes in the economy might influence asset returns. Since asset prices are tied to both long-term economic growth trends and short-term business cycles,…
Analysts face three major types of uncertainty: Model Uncertainty – This refers to whether the chosen model is conceptually or structurally appropriate. If the model is flawed, even perfect inputs…
Several psychological biases can distort an analyst's judgment: Anchoring Bias: Analysts may give too much weight to initial data or numbers and fail to adjust enough. To reduce this, they…
Analysts should be cautious because correlation alone does not imply causation. A significant correlation between variable A and B could mean that A predicts B, B predicts A, both are…
Ex post (historical) measures can mislead analysts when trying to estimate ex ante (forward-looking) risk and return, due to two key biases: The Peso Problem (Underestimating Ex Ante Risk): Sometimes,…
Dimensionality problem arises when you try to analyze a large number of assets (variables) but don't have enough historical observations (data points). Specifically: To calculate a covariance matrix (which measures…
Analysts should be aware of several key considerations when using historical data: Stationarity: Prefer the longest dataset with stable statistical properties (stationarity), as longer data histories give more precise estimates.…