This week’s
edition has sections on United States, Markets, Portfolio/Quant, Trading, High-Frequency/Algo,
Hedge Funds and Other. EDIT: Calendar updated.
Coming up soon: Weekender:
Regulation & Economics and Weekender:
Off-Topics & Views. Don’t miss my previous posts:
Previously on
MoreLiver’s:
UNITED STATES
Early FOMC preview – alphaville
/ FT
It’s a two-day meeting, but there won’t be a presser
afterwards or an updated Summary of Economic Projections when it ends. Just a
statement. Still, there are a few things that might happen…
Another fiscal cliff
chart – alphaville
/ FT
This one from Goldman economists, showing the
projected impact on GDP growth in each
quarter from the various provisions.
That's the implication of CBO's latest forecast
MARKETS
Which Assets Will
Benefit From QE? – The
Short Side of The Long
Equity market internals continue to deteriorate,
especially in the Technology sector, which transitionally has had leading
characteristics.
If The Market's
Disconnect With Economic Reality is Over, Watch Out Below – ZH
It seems, however, that just like AAPL, everyone
believes everyone else to be the greater fool - and this time is different.
What is replacing the
yen as a "safe-haven" currency? – Sober
Look
PORTFOLIO / QUANT
Market Timing and
Roulette Wheels Revisited – Investment Risk
and Performance
In a 2001 Financial Analysts Journal article, we
analyzed the difficulty of beating a buy-and-hold strategy using active asset
switching. In this article, we present updated results. On average, during the
2000–11 time period, beating the market through market timing was difficult but
not as difficult, on average, as during the 1926–99 period. The ease or
difficulty of beating the market, however, varies tremendously over time. This
reality has major implications for performance measurement.
Does Academic Research Destroy Stock Return
Predictability? – SSRN
We study
the out-of-sample and post-publication return-predictability of 82
characteristics that are identified in the academic literature. The average
out-of-sample decay due to statistical bias is about 10%, but not statistically
different from zero. The average post-publication decay, which we attribute to
both statistical bias and price pressure from aware investors, is about 35%,
and statistically different from both 0% and 100%. Consistent with informed
trading, after publication, stocks in anomaly portfolios experience higher
volume, variance, and short interest, and higher correlations with portfolios
that are based on published anomalies. Consistent with costly (limited)
arbitrage, the post-publication return decline is greater for anomaly
portfolios that consist of stocks that are large, liquid, have high dividend
yields, and have low idiosyncratic risk. (full pdf from EFA2012)
Modern Portfolio
Theory: Bruised, Broken, Misunderstood, Misapplied? – CFA
Institute
If the global financial crisis has left us with any
enduring lessons, it’s that asset return distributions can be significantly
skewed and asymmetrical, and that fat tails are the norm rather than the
exception. So how can investment practitioners manage this reality?
Davids, Goliaths, and Business Cycles – SSRN
Our
variable is the annual change in the weight of the largest 250 firms in the
aggregate stock market. We provide a theoretical foundation for our predictor's
forecasting ability by showing that it is positively correlated with changes in
risk aversion in a representative agent model, and hence positively related to
expected returns. This positive correlation comes about because our proposed
predictor is significantly counter-cyclical; since small and large firms react
differently to business cycles, the weight of large firms in the market
portfolio increases in recessions and decreases in expansions.
Life on the Big
International Frontier – Timely
Portfolio
Although I have used the Kenneth French data library
extensively in various posts, I have not yet used the international data sets
paired with the wonderful paper. (includes R code)
Vol of Vol – Falkenblog
The idea was simple. Instead of sorting by vol, they
sorted by vol of vol, and generate a rather large annualized return difference (10%) between the high vs. low
vol-of-vol buckets. It's a bit like the guys at Gillette coming out with 5
blades, applied to volatility.
Why diversification doesn't work – The
Physics of Finance
The new
paper by physicist Tobias Preis and colleagues makes this point with probably
the largest data set used so far, looking at the stocks in the DJIA over about
70 years…a trending market, in either direction, induces significant
correlations among the DJIA stocks.
Downside risk and the value anomaly – voxeu.org
The value
anomaly – higher average returns on value as opposed to growth stocks – is a
robust phenomenon on equity markets around the world. This column argues that
the exposure to downside market risk can explain why value stocks outperform
their growth counterparts. The key is to distinguish between 'bad' and 'good'
downside market shocks.
Modelling versus science – pannelldiscussions
Mick Keogh,
from the Australian Farm Institute, recently argued that “much greater caution
is required when considering policy responses for issues where the main science
available is based on modelled outcomes”. I broadly agree with that conclusion,
although there were some points in the article that didn’t gel with me.
Mutual fund casinos still skimming billions – MarketWatch
Who loses?
You and the other 95 million American investors are losers in this casino.
Years ago Bogle figured out how to cut your losses. Here’s his secret: In the
real world of games, indexing beats actively managed funds
7th Annual Machine
Learning Symposium – NYAS
includes abstracts of papers
TRADING
NYSE Euronext to
launch European retail service: sources – Reuters
NYSE Euronext (NYX.N), the transatlantic exchange
group, plans to launch a European trading platform early next year designed to
boost volumes from small investors by offering them better prices, according to
sources close to the firm.
Beating the Show-Offs – The
Reformed Broker
This
requires discipline, of the behavioral and emotional sort, way more than it
requires any kind of overly acrobatic equity disco…Aspiring Big Shots take
note: Learning not to fall (or not to fall too far or too often) is of much
greater benefit than learning to dance and prance atop the rigging. On a real
ship, you'll never see the captain doing that stuff.
Cowboy Ethics – The View
From The Blue Ridge
Goodman’s letters may be somewhat of a chore for those
not accustomed to spending weekends reading annual reports, but they are filled
with terrific market perspective and investment advice. I particularly enjoyed the excerpt below
The Great Paper
Trading Debate: Helpful or Hurtful? – SMB
Trading
The Science of
Analysis and the Art of Trading – Dynamic
Hedge
The Secrets I Learned from Jesse Livermore – Trader’s
Journal
Wrestling With Forecasting – The
Capital Spectator
All
forecasts are wrong. That’s the nature of trying to look through the fog of
uncertainty for guidance on the future. Some forecasts are less wrong than
others, of course, but it’s always sensible to assume that the prediction du
jour contains noise. That doesn’t mean that forecasting is worthless, but it
does make predictions dangerous if you don't look at the estimates in
probabilistic terms. But that's hardly standard procedure in the wider world.
Thinking through the finer points for forecasting is too often neglected, and
sometimes ignored entirely.
A Bias For Real-Estate – The Psy-Fi
Blog
You’d
expect that if we’re strangely biased when it comes to financial transactions
involving the stockmarket that we might also be a bit slanty-brained when it
comes to other asset classes as well.
And as real-estate is probably the biggest single investment any of us
will ever make it’s probably a prime candidate for a bit of behavioral
analysis.
HIGH FREQUENCY / ALGO
A Tax to Kill High Frequency Trading – Forbes
High-Speed Trading No Longer Hurtling Forward – NYT
It’s Time for a Tax
to Kill High Frequency Trading – naked
capitalism
Kill switches may be
too difficult to implement despite new call by CFTC member, expert says – Thomson
Reuters
Aussie Stocks Suffer
HFT Stop-Run Glitch At Open – ZH
In a low volume equity trading environment, PDQ says its
new algos will help retail and institutional investors cut costs and speed up
their executions.
Gas Market Stung by
Rapid Traders – WSJ
High-Frequency
Trading a Game-Changer for the Natural Gas Market – Advanced
Trading
Fierce HFT competition has narrowed spreads to
virtually nothing in equities, so traders are looking for markets with fatter
margins, which makes the commodities markets attractive.
‘Flash Crash’ Reforms Will Fail to Make Markets Safer, Study Claims – HITC
US ‘flash crash’ reforms will fail to avert another
market meltdown unless they are coupled with new “liquidity-based circuit
breakers”, researchers claim.
Why there’s less high-frequency trading – Felix
Salmon / Reuters
HEDGE FUNDS
Have Hedge Funds Lost
the Magic? – Pension
Pulse
Hedge Funds & the Global Economic Crisis:
Willing Culprits or Easy Scapegoats? – all
about alpha
At the time
and over the last few years, Hedge Funds have received a large portion of the
blame for the economic crash. They have often been portrayed as one of the main
culprits responsible for causing the global financial crisis.
OTHER
Book Bits | 10.20.12 – The
Capital Spectator
Why I Left Goldman
Sachs, Chapter Three: “My Alleged Competition” – Dealbreaker
What JP Morgan’s
release of VaR has in common with sex and computer viruses – Nick
Dunbar
Bond traders: exhausted new stars of financial
markets – Reuters
Three years
of crisis in the euro zone have thrust the once-sleepy government debt market
into the public spotlight and transformed the way bonds are viewed, valued and
traded.
Ask A Banker: What's
A Derivative? – NPR
Why are we bailing
out the banks? part three – Lies and Opposition – Golem
XIV
Yes, There Is Such a Thing as a Rational Bubble
-- We're in One Now
– Minyanville
This feels
like a bubble. Every investor rationally expects a return greater than his or
her investment, yet also knows that the price must eventually crash below his
or her purchase price. Before resolving this dilemma, we have to discuss why a
price might follow this kind of process. I’ll tackle that next week.
Did Central Bankers Kill The Single-Name CDS
Market (For Now)? –
ZH
Barclays: CDS
trading volumes have increased for indices and dropped for single names. We
relate this to the current market environment, with an intense focus on
political/central bank headlines and high correlation between individual names.