Quant Mashup - SR SV

Commodity carry [SR SV]

Across assets, carry is defined as return for unchanged prices and is calculated based on the difference between spot and futures prices (view post here). Unlike other markets, commodity futures curves are segmented by obstacles to intertemporal arbitrage. The costlier the storage, the greater is

*- 2 days ago, 10 Dec 2018, 09:44am -*

Understanding the correlation of equity and bond returns [SR SV]

The correlation of equity and high grade sovereign bond returns is a powerful driver of portfolio construction and the term premia of interest rates. This correlation has turned from positive in the 1970s-1990s to negative in the 2000s-2010s, on the back of similar shifts in the correlation between

*- 1 week ago, 1 Dec 2018, 08:39am -*

CDS term premia and exchange rates [SR SV]

The term structure of sovereign credit default swaps (CDS) is indicative of country-specific financial shocks, because rising country risk affects short-dated maturities more than longer-dated ones. This feature allows disentangling global and local risk factors in sovereign CDS markets. The latter

*- 2 weeks ago, 25 Nov 2018, 09:21pm -*

Realistic volatility risk premia [SR SV]

The volatility risk premium compensates investors for taking volatility risk. Conceptually it is based on the difference between options-implied and expected realized volatility. In equity markets this premium should be positive in the long run and fluctuate overtime depending on the market’s

*- 3 weeks ago, 19 Nov 2018, 08:37am -*

How systemic financial risk is measured [SR SV]

Public institutions have developed a wide range of methods to track systemic financial risk. What most of them have in common is reliance on financial market data. This implies that systemic risk indicators typically only show what the market has already priced, in form of correlation, volatility or

*- 1 month ago, 10 Nov 2018, 06:00am -*

How convenience yields have compressed real interest rates [SR SV]

Real interest rates on ‘safe’ assets such as high-quality government bonds had been stationary around 2% for more than a century until the 1980s. Since then they have witnessed an unprecedented global decline, with most developed markets converging on the U.S. market trend. There is evidence

*- 1 month ago, 3 Nov 2018, 09:21am -*

Variance term premia [SR SV]

Variance term premia are surcharges on traded volatility that compensate for bearing volatility risk in respect to underlying asset prices over different forward horizons. The premia tend to increase in financial market distress and decrease in market expansions. Variance term premia have

*- 1 month ago, 27 Oct 2018, 09:58am -*

The predictability of market-wide earnings revisions [SR SV]

Forward earnings yields are a key metric for the valuation of an equity market. Helpfully, I/B/E/S and DataStream publish forward earnings forecasts of analysts on a market-wide index basis. Unfortunately, updates of these data are delayed by multiple lags. This can make them inaccurate and

*- 1 month ago, 13 Oct 2018, 05:15am -*

Multiple risk-free interest rates [SR SV]

Financial markets produce more than one risk-free interest rate. This is because there are several separate market segments where structured trades replicate such a rate. Differences in remuneration arise for two reasons. First, financial frictions can prevent arbitrage. Second, some risk-free

*- 2 months ago, 6 Oct 2018, 05:50am -*

How lazy trading explains FX market puzzles [SR SV]

Not all market participants respond to changing conditions instantaneously, not even in the FX market. Private investors in particular can take a long while to adapt to changes in global interest rate conditions and even institutional investors may be constrained by rules and lengthy process. A

*- 2 months ago, 30 Sep 2018, 11:59am -*

A brief history of quantitative equity strategies [SR SV]

Understanding quantitative equity investments means understanding a significant portion of market positions. Motivated by the apparent failure of the capital asset pricing model and the efficient market hypothesis, a large share of equity investors follows stylized “factors” that are expected to

*- 2 months ago, 22 Sep 2018, 06:20am -*

Predicting equity volatility with return dispersion [SR SV]

quity return dispersion is measured as the standard deviation of returns across different stocks or portfolios. Unlike volatility it can be measured even for a single relevant period and, thus, can record changing market conditions fast. Academic literature has shown a clear positive relation

*- 2 months ago, 15 Sep 2018, 05:29am -*

Earnings yields, equity carry and risk premia [SR SV]

Forward earnings yields and equity carry are plausible indicators of risk premia embedded in equity index futures prices. Data for a panel of 25 developed and emerging markets from 2000 to 2018 show that index forward earnings yields have been correlated with market uncertainty across countries and

*- 3 months ago, 8 Sep 2018, 08:56am -*

Beta herding [SR SV]

Beta herding means convergence of market betas of individual stocks that arises from investors’ biased perceptions. Adverse beta herding denotes the dispersion of such betas that arises from a reversal of the bias. A new paper suggests that overconfidence in predictions of overall market direction

*- 3 months ago, 1 Sep 2018, 10:36pm -*

Equity index futures returns: lessons of 2000-2018 [SR SV]

The average annualized return of local-currency index futures for 25 international markets has been 6% with a standard deviation of just under 20%. All markets recorded much fatter tails of returns than should be expected for normal distributions. Autocorrelation has predominantly been positive in

*- 3 months ago, 18 Aug 2018, 06:12am -*

U.S. dollar exchange rate before FOMC decisions [SR SV]

Since the mid-1990s the dollar exchange rate has mostly anticipated the outcome of FOMC meetings: it appreciated in the days before a rate hike and depreciated in the days before a rate cut. This suggests that since fixed income markets usually predict policy rate moves early and correctly their

*- 3 months ago, 15 Aug 2018, 11:11pm -*

Endogenous market risk [SR SV]

Understanding endogenous market risk (“setback risk”) is critical for timing and risk management of strategic macro trades. Endogenous market risk here means a gap between downside and upside risk to the mark-to-market value that is unrelated to a trade’s fundamental value proposition. Rather

*- 4 months ago, 11 Aug 2018, 10:46am -*

What variance swaps tell us about risk premia [SR SV]

Variance swaps are over-the-counter derivatives that exchange payments related to future realized price variance against fixed rates. Variance swaps help estimating term structures for variance risk premia, i.e. market premia for hedging against volatility risk based in the difference between

*- 4 months ago, 4 Aug 2018, 12:41pm -*

The dangerous disregard for fat tails in quantitative finance [SR SV]

The statistical term ‘fat tails’ refers to probability distributions with relatively high probability of extreme outcomes. Fat tails also imply strong influence of extreme observations on expected future risk. Alas, they are a plausible and common feature of financial markets. A summary article

*- 4 months ago, 28 Jul 2018, 02:58am -*

The importance of volatility of volatility [SR SV]

Options-implied volatility of U.S. equity prices is measured by the volatility index, VIX. Options-implied volatility of volatility is measured by the volatility-of-volatility index, VVIX. Importantly, these two are conceptually and empirically different sources of risk. Hence, there should also be

*- 4 months ago, 21 Jul 2018, 08:23am -*

Seasonal effects in commodity futures curves [SR SV]

Seasonal fluctuations are evident for many commodity prices. However, their exact size can be quite uncertain. Hence, seasons affect commodity futures curves in two ways. First, they bias the expected futures price of a specific expiry month relative that of other months. Second, their uncertainty

*- 5 months ago, 7 Jul 2018, 07:56am -*

VIX term structure as a trading signal [SR SV]

The VIX futures curve reflects expectations of future implied volatility of S&P500 index options. The slope of the curve is indicative of expected volatility and uncertainty relative to volatility and uncertainty priced in the market at present. Loosely speaking, a steeply upward sloped VIX

*- 5 months ago, 23 Jun 2018, 07:05am -*

FX carry strategies (part 2): Hedging [SR SV]

There is often a strong case for hedging FX carry trades against unrelated global market factors. It is usually not difficult to hedge currency positions – at least partly – against global directional risk and against moves in the EURUSD exchange rate. The benefits of these hedges are [1] more

*- 5 months ago, 16 Jun 2018, 05:56am -*

FX carry strategies (part 1) [SR SV]

FX forward-implied carry is a valid basis for investment strategies because it is related to policy subsidies and risk premia. However, it also contains misdirection such as rational expectations of currency depreciation. To increase the signal-noise ratio FX carry should – at the very least –

*- 6 months ago, 9 Jun 2018, 10:16am -*

A simple rule for exchange rate trends [SR SV]

Over the past decades developed market exchange rates have displayed two important regularities. First, real exchange rates (nominal exchange rates adjusted for domestic price trends) have been mean reverting. Second, the mean reversion has predominantly come in form of nominal exchange rate trends.

*- 6 months ago, 2 Jun 2018, 09:32am -*

Commodity pricing [SR SV]

A new paper combines two key aspects of commodity pricing: [1] a rational pricing model based on the present value of future convenience yields of physical commodity holdings, and [2] the activity of financial investors in form of rational short-term trading and contrarian trading. Since convenience

*- 6 months ago, 21 May 2018, 08:50am -*

Using yield curve information for FX trading [SR SV]

FX carry trading strategies only use short-term interest rates (and forward basis) as signal. Yet both theoretical and empirical research suggests that the whole relative yield curve contains important information on monetary policy and risk premia. In particular, the curvature of a yield curve

*- 7 months ago, 12 May 2018, 03:59am -*

Fixed income carry as trading signal [SR SV]

Empirical evidence for 27 markets suggests that carry on interest rate swaps has been positively correlated with subsequent returns for the past two decades. Indeed, a naïve strategy following carry as signal has produced respectable risk-adjusted returns. However, this positive past performance

*- 7 months ago, 28 Apr 2018, 09:02am -*

Interest rate swap returns: empirical lessons [SR SV]

Interest rate swaps trade duration risk across developed and emerging markets. Since 2000 fixed rate receivers have posted positive returns in 26 of 27 markets. Returns have been positively correlated across virtually all countries, even though low yield swaps correlated negatively with global

*- 8 months ago, 18 Mar 2018, 01:48am -*