Quant Mashup - SR SV

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

*- 6 years 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

*- 6 years 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

*- 6 years 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

*- 6 years 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

*- 6 years 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 years 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 years 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 years 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

*- 6 years 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

*- 6 years 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

*- 6 years ago, 18 Mar 2018, 01:48am -*