For US dollar pairs at least…
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Posts tagged 'Correlation'
Central bank puts have done a great job of removing tail risks.
Such is the conclusion of the team at Bank of America Merrill Lynch upon analysing the remarkable drop in trade conviction of late.
In FX, the move in volatility has been notable… Read more
The Australian dollar has veered away from its usual path. *Bad Aussie.*
But there is a widespread belief it will have to eventually find its way back. How quickly it does so, however, is open to debate. Read more
The recent coverage of JP Morgan’s credit derivative ‘whale’ trade – supposedly a market hedge rather than directional position for the bank — has seen many financial pundits wonder how it could be that JP Morgan has a short position on any of the underlying names in the credit against which it is supposedly selling protection?
The index is made up of 121 North American companies, all of which were investment grade at the time the index started trading in the fall of 2007. Read more
Helen Bartholomew at International Financing Review (IFR) has an interesting story out this week about the industry’s push to create a workable correlation product.
Currently, if you want to take a view on correlation, it’s pretty difficult. Bilateral correlation swaps generate mark-to-market risk, while option strategies require a lot of delta hedging of both the index and the constituents — what’s more, this may become hugely expensive if and when Europe introduces a transaction tax. Read more
Some very interesting proposed changes to Standard & Poor’s rating methodology for CDOs made of stuff like ABS, in the following request for comment, we think:
Standard & Poor’s Ratings Services is requesting comments on proposed changes to the methodologies and assumptions it uses to rate collateralized debt obligation (CDO) transactions backed by structured finance (SF) securities… Read more
“When the storm comes, everyone gets wet.”
Remember when we facetiously told you to shelve your adviser? Probably no need to bring him back yet. Read more
Just as correlation does not imply causation, this post should not imply usefulness. Consider it a bit of light frippery at the end of a rather challenging week for symmetrical trading.
Here’s how it works. We’ve drawn the graphs of a few securities into Google Correlate, which finds search terms whose popularity matches the given trend over time. It is, in short, an automatic logical fallacy generator. Read more
You don’t need one right now…
“The difference between investing in Emerging Markets equities, Developed Markets equities, and High Yield bonds is now effectively zero.” Read more
No it’s not Tyra Banks. Sorry.
According to a technical paper published on Risk.net by Alex Langnau, global head of analytics at Allianz Investment Management and Daniel Cangemi, head of FICC trading at EFG Financial Products, Wall Street’s next top (risk) model is actually a copula that attempts to explicitly link correlation skew to systemic risk so as to improve tail risk management of large portfolios. Read more
Readers may recall a likening of the eurozone to a giant collateralised debt obligation earlier this week.
Greece, Ireland and Portugal formed the equity slice, with Italy in the middling mezzanine, according to Will Porter at Credit Suisse. With the market suddenly panicking over all things Italiano, he said, it looked like debt worries were working their way up the eurozone CDO’s capital structure. Read more
ConvergeEx Group’s Nicholas Colas has noted something “remarkable” this month when it comes to correlation:
...the rally in the S&P 500 of 3.8% over the past four weeks has come with HIGHER industry sector correlations. That’s unusual for U.S. equity markets, which have tended towards lower correlations in rising markets and clustered returns when things get ugly. Read more
It’s an analogy already made by many commentators on Thursday.
And picked up with some aplomb on Friday by BNP Paribas’ Mehernosh Engineer: Read more
We ♥ this note from Bank of America Merrill Lynch’s Ruslan Bikbov and Priya Misra.
It’s on a subject dear to our own hearts here on FT Alphaville — the curious case of persistently low volatility and the idea that it might be masking systemic risk. It also weaves together a plethora of other themes — massive short volatility positions, search for yield, correlation, LTCM – we’ve touched on. Read more
The dollar may be dropping in the spot market, but in options world… it’s still going strong.
The option market skew in dollar crosses — the difference between the implied volatility of out-of-the-money dollar-related puts and calls – remains bid towards dollar appreciation. And Goldman Sachs figures that the “puzzling” dollar skew can be explained by cross asset hedging, in a piece of research out on Wednesday. Read more
During last summer’s US economic slump, the CBOE S&P 500 implied correlation index hit a couple of intraday record highs before starting a consistent (if jumpy) downward trend through the end of the year, as equity markets recovered and the tin hats came off.
Since then the index been somewhat erratic, which is unsurprising given the big event-driven moves we’ve seen this year: Read more
Harry Tchilinguirian at BNP Paribas observes the curious breakdown in correlation between oil and equities of late:
The last time Nomura talked ‘risk on/risk off‘ they thought it had ruptured.
Now they think the market phenomenon — which had seen correlations intensify in recent (QEased and crisis-ed) years — might be ruined for good. Read more
Quant crisis. [kwont] [krisis] Origin: In August 2007 a host of quant-driven hedge funds experienced losses on the back of the subprime crisis and a series of margin calls. This led to a ripple effect causing losses across various quant strategies and would become known as the ‘quant crisis’ or ‘quant scare’ of 2007.
And might be (sort of) back, according to Morgan Stanley quant strategist Charles Crow. He thinks there’s been some rather significant volatility in quant-driven portfolios in recent weeks, which has shades of late summer 2007. Read more
Another day, and another widening in the WTI-Brent front-month future spread — this time to what looks to be approaching record wides.
The spread hit as much as -9.50 on Monday and according to Bloomberg data the record for the differential stands at -10.67, as struck on February 12, 2009: Read more
Hedge funds are crowding into more of the same trades, the Wall Street Journal reports, amplifying market swings during crises. Such trading has stoked market jitters in recent months and helped to diminish the impact of corporate fundamentals on stock-market movements, the WSJ says. The paper cites research by MIT researcher and fund manager Andrew W. Lo, which shows funds have become more likely to lose and gain money together over the past five years. There is a roughly 79 per cent chance any randomly selected pair of hedge funds will move up and down in tandem in a given month from 2006 to 2010, compared with 67 per cent from 2001 to 2005. Read more
Don’t short schadenfreude yet – it’s still tough at the hedgies.
From Reuters on Tuesday: Read more
Correlation, as we are now well learning, is a phenomenon which increases when market tensions rise.
That is because when investors flock to the exits, they tend to move more uniformly than usual. Read more
Whilst much has been written about the rise in correlation recently — what’s been less frequently observed is the strange disconnection that’s occurring between correlation and volatility.
The two traditionally move together. That is, correlation tends to rise and fall with volatility. Read more
Correlation has purportedly come down a bit since its peak levels achieved earlier this summer.
Nevertheless, it is still running way above historic norms. Read more
Nomura’s fixed income team reckon ‘risk on, risk off‘ is too simple.
In fact, they say the recent bout of QE2-inspired herding of risk is breaking down. Read more
Could there be a bubble in correlation?
And by that rationale could it be time to position against a bursting of that bubble? Read more
Correlation swaps. Next big thing or next big risk factor?
Theo Casey, a MoneyWeek managing editor, has looked at the fledgling asset class in more detail this week. In an article for Futures and Options Intelligence he concludes that for many investors . . . it’s probably the latter. Read more
Here’s one for a spirited debate.
A new paper from the National Bureau of Economic Research by Jeffrey Wurgler, Nomura professor of finance at New York University, discusses the potentially overlooked perils of indexing. Read more
1Bernanke weighs in on robot wars; brings Keynes for backup
2Pump up, debase
3S&P 2,100, by Goldman Sachs
4Secret liquidity and Scottish independence
5Apple Operations International, facts (?) du jour
Show more6Collateral crunch-counting gets sophisticated
7In which the FTSE puts the crisis behind it
8The risk of a Japanese VaR shock
9Further reading
10A Kazakh muddle
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