I've changed the focus of the Trading & Economics-post a bit - less journal articles and hard-core quant stuff, more ideas and practical stuff. Hope you like my new approach.
ASSET ALLOCATION
How correlations change – Felix
Salmon / Reuters
Paul Murphy has a good overview of RORO today:
the risk-on, risk-off phenomenon whereby all assets are increasingly
correlated. HSBC has even come up with a RORO Index, which, you won’t be
surprised to hear, is going up and to the right
The stay-liquid-and-wait strategy – Felix
Salmon / Reuters
After a day spent talking about how much upside
there is if things go right, and how much downside there is if things go wrong,
I was reasonably convinced that we’re now closer to a bimodal world than one
with thin tails
Conditional Probabilities Between Hedge Fund
Returns & Equity Returns – market
folly
Burnham Banks has penned an interesting
comparison of conditional probabilities between hedge fund returns and equity
market returns on a monthly basis. For this study, he used the MSCI World
Equity Index and the HFRI Hedge Fund Index.
Research Review | 4.17.2012 | Asset Allocation – The
Capital Spectator
Summaries
and links to six asset allocation research papers
Managing the Risk of Momentum – Barroso &
Santa-Clara (pdf)
Compared to the market, value or size risk
factors, momentum has offered investors the highest Sharpe ratio. However,
momentum has also had the worst crashes, making the strategy unappealing to
investors with reasonable risk aversion. We find that the risk of momentum is
highly variable over time and quite predictable. The major source of
predictability does not come from systematic risk but from specific risk.
Managing this time-varying risk virtually eliminates crashes and nearly doubles
the Sharpe ratio of the momentum strategy. Risk-managed momentum is a much
greater puzzle than the original version.
OIL
Feeling peaky: The economic impact of high oil
prices – The Economist
As the developed-world economy tries to gain
momentum, it faces a persistent headwind. The oil price remains stubbornly over
$100 a barrel, acting like a tax on Western consumers.
Peak oil goes mainstream (again) – alphaville
/ FT
Comments
the above and adds: The question of what
that impact will be, and how it will be managed, is much more interesting than
straw man arguments about when exactly the oil will “run out”.
More thoughts on peak oil – Econbrowser
I submit that meeting the growing global demand
for crude oil over the last five years has posed significant challenges for the
world economy. And those who worry that the next 5-10 years might be like the
last should not be dismissed as crackpots.
Peak oil is nowhere to be found on the WTI
futures curve – Sober
Look
Part of the driving force behind this subdued
view on prices is the reassessment of growth in emerging markets. A component
of this reassessment is China shifting to domestic
demand and reduced infrastructure investment. But the supply side of this
dynamic is also changing… The market has now priced in declining oil prices at
least through 2020. If "peak oil" dynamics are still at play, they are
nowhere to be found on this futures curve.
Commodities don't provide
"diversification" in a crisis – Sober Look
In a crisis a commodity basket may not be very
effective in providing the diversification one would expect from historical
correlations (reaching 80% in the recent crisis as commodities sold off with
equities). The same thing happened in 1929.
PLAYERS
A Backstage Pass to a Show You Wouldn't Believe – Huffington
Post
The compensation system and the investment
selection processes on Wall St. are based upon bullying. The Branch Office Manager bullies the Sales
Manager. The Sales Manager bullies the brokers. And the brokers basically bully
the unsuspecting investors into shlock they don't need.
The Tension between Protecting Your Job or
Your Clients’ Money
– GMO (pdf)
Alternatively
read it on BI
or ZH
Quarterly letter by Jeremy Grantham: The
central truth of the investment business is that investment behavior is driven
by career risk. In the professional
investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes knew so well,
is first and last to keep your job. To do
this, he explained that you must never, ever be wrong on your own.
Wall Street Receives Volcker Rule Clarity – DealBook
/ NYT
Regulators on Thursday announced a formal
clarification that Wall Street need not immediately comply with a new rule
banning banks from trading with their own money, sending sighs of relief across
the financial industry.
The Sohn Investment Idea Contest – The Sohn Conference
Foundation
Submit an
investment idea (single trade). Finalists invited to present it to
billion-dollar managers. Previous winner’s proposal.
STOCK MARKETS
Sell in May? 9 Trillion Reasons to Say NO – The
Big Picture
History shows that ‘Sell in May and go away’
has applied when the Federal Reserve was in a tightening mode during the
six-month span from May to November. If
the Fed was actively raising interest rates, withdrawing or constricting
credit, imposing additional reserve requirements, or taking an action that was
of a tightening mode, stock markets were usually punished in that six-month
period.
AlphaValue:
The real concern about French balance
sheets is the extent of the accumulated goodwill. At €390bn, against a current
market cap of €1,010bn, France holds an absolute
record with a 39% ratio. Corporate UK stands at 16%,
corporate Germany at 25%.
STATISTICS, QUANT METHODS
Sixth ECB Statistics Conference – ECB
Plenty of
presentations from this ending week’s two-day event
School for quants – FT
Inside UCL’s Financial Computing Centre, the
planet’s brightest quantitative analysts are now calculating our future
“We can now build an algorithm in days and we
won’t have the lost-in-translation problem about what will ultimately be built
-- what’s lost in phone calls and e-mails”…The bank has offered individualized
algorithms to clients for several years. The iPad system is more visual and
intuitive, Susi said. “It is super-powerful and way less scary,”
Random is as random does – The Endeavour
What is
randomness? Nobody knows, or at least there’s no consensus. Everybody has some
vague ideas what randomness is, but when you dig into it deeply enough you find
all kinds of philosophical quandaries.
The life and death of a strategy – epchan
Sometimes it is instructive to look back at
some strategies that used to thrive, and then quite suddenly contracted a
chronic illness that ultimately led to its demise.
The week kicks off with the first round of
presidential elections in France. However, the macro
news is more likely to be dominated by a two-day Fed policy meeting starting
Tuesday and a crucial Bank of Japan meeting next Friday.
The War For The BOJ's Balance Sheet Gets Real – ZH
Political pressure for expanding easing was
highlighted by lawmakers this month rejecting a government nominee for the
BOJ’s board who some saw as lacking enthusiasm for bolder measures
Deny the facts when they contradict the theory – Bill Mitchell
The mainstream financial press have been keen
to quote Alesina and Perotti (1995) and related publications in the 1990s which
purported to show how nations that engaged in fiscal contraction at a time when
economic growth was faltering were able to recover. These articles are used to
justify the fiscal austerity now being imposed at massive cost in many nations.
However the same commentators have not seen fit to quote or refer to Perotti’s
2011 research which demonstrates that the conditions that might have allowed
some nations (in isolation) to successfully grow during a period of fiscal
consolidation are not present now in Europe or elsewhere and so fiscal
austerity will only cause damage.
From Financial Crisis to Stagnation: An
Interview with Thomas Palley – naked
capitalism
A central and critical element of my book is
its emphasis on the role of economic ideas in generating the crisis. This
feature fundamentally distinguishes it from mainstream explanations that tend
to represent the crisis in terms of surprise events and economic shocks (e.g. black
swans).
FiveBooks Interviews: Michael Lind on American
Economic History – The
Browser
The American economy has been driven by waves
of technological change and the successful adoption of ideas from elsewhere.
The author of Land of Promise tells us how it happened, and what history teaches us about the way
ahead
Plutocrats and Printing Presses – Krugman
/ NYT
the actual politics is utterly the reverse of
what’s being claimed. Quantitative easing isn’t being imposed on an unwitting
populace by financiers and rentiers; it’s being undertaken, to the extent that
it is, over howls of protest from the financial industry. I mean, where are the
editorials in the WSJ demanding that the Fed raise its inflation target?
Commerzbank’s Rieger Says Quantitative Easing
Is Over – BB (mp3)