Another good point on EFSF bond insurance, the subject du jour — from Shahin Vallée of the Bruegel think-tank:
The entire proposal rests on the premise that financial markets are now shunning these debts because of marginal doubts about their recovery value in the case of a credit event and that therefore by guaranteeing a small portion of this debt, the credit enhancement will comfort doubtful investors. This is an inadequate assessment. Financial investors have experienced tremendous price volatility in the last year, which now constrains a wide range of natural buyers who have been forced to adjust the size and duration of their portfolios accordingly. These investors are not driven by expected recovery value but by price volatility, this solution will not change their reaction function at all. For those investors that could be comforted by a degree of credit enhancement, it might be too small to be really enticing. Barring some friendly exceptional instances, experience is that when countries default or restructure, it tends to involve larger haircuts than the credit enhancement would offer. 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
“All we have left to show for our three year liquidity orgy is the most correlated period in modern finance.”
That’s the succinct and telling view of volatility guru Christopher Cole at Artemis Capital Management. Read more
The Markit iTraxx SovX CEEMEA contains a basket of 15 sovereigns from Central and Eastern Europe as well as the Middle East. Italy’s CDS spread is now wider than all but one of them – Ukraine.
Looking at the Markit CDX.EM, only Argentina, and once again the Ukraine, can offer chunkier spreads. Outer limits, indeed. Read more
The US Securities and Exchange Commission has added exchange-traded funds (ETFs) to its inquiry into what amplified August’s topsy-turvy swings in the stock market, the Wall Street Journal reports. As part of the investigations regulators will be talking to firms that trade ETFs, asking questions about whether they added to the market’s volatility, the WSJ’s sources say. Exchange-traded funds have surged in popularity and now generate as much as 40 per cent of exchange trading volume in the United States, according to data from Morningstar. They are particularly loved by high-frequency traders who utilise them for index arbitrage strategies. The SEC inquiry, which is likely to focus on the role of leveraged ETFs in particular, is also part of a broader look by regulators into exotic trading vehicles and high-frequency trading. According to the WSJ, the SEC voted last week to open up a public dialogue about the use of derivatives by mutual funds and ETFs, among other things.
Or, turning the leveraged into fondue. Hat-tip to Scott Barber of Reuters graphics:
Scheduled for Tuesday actually:
FT Alphaville just had a very interesting conversation with Ari Bergmann, managing principal at Penso Advisors, with respect to what’s been happening in the world of volatility hedging this year.
And specifically how things have changed since July. Read more
High-frequency traders made a record profit of $60m on August 8, during a 635-point Dow plunge and the NYSE’s fourth-busiest ever trading day, the WSJ reports. If this level of profit could be repeated across 2011, the figure would be $15bn, compared to $7.2bn made by HFT firms in 2009, according to Tabb data. While high volumes led to rick picking for profit, traders said that statistical arbitrage funds and HFT firms specialising in market-making had done especially well. A pair of funds run by Renaissance Technologies have racked up $200m of gains in August, leaving them up 5.9 per cent for the month so far.
August’s extreme stock trading volatility will still not be enough to turn around declining revenues on Wall Street, the WSJ reports. Despite the past week having seen some of the busiest trading days in history, banks are unlikely to take enough commission revenue from trades to make up for declines in the inventories of stocks they hold. Similarly, bond trades have increased but new underwriting deals remain absent from markets. Merger and stock underwriting volumes are also down sharply on the year. Underwriting fees on public offerings for companies bailed out in the crisis are also falling as the government haggles with banks, Reuters reports.
In the natural world a magnitude 9.0 earthquake equals widespread devastation.
If you equate standard deviations with the Richter scale, it looks like in 2008 we experienced something in the region of a 9.2 event. That ties with the idea of widespread devastation.
Marginally more tasteful than a hooker’s drawers anyway… (H/T Michael Roston)
Wednesday 10 August, New York. Tabloid discovers volatility.
The financial turmoil triggered by Europe’s debt crisis, the US credit rating downgrade and increasing concerns over global growth are causing companies to cancel or put off planned initial public offerings, reports the FT. “The primary markets are shut for now,” said Craig Coben, European head of equity capital markets at Bank of America Merrill Lynch. “This is not a good time to launch IPOs.” There have been about $134bn of IPOs so far this year but volatile equity markets will now make it difficult to beat last year’s $281bn total.
As the Vix and More blog duly noted last Friday, not only has spot Vix been spiking in its own right (last print seen around the 40 mark on Monday), the entire Vix term structure has flipped into backwardation over the last 10 trading days:
The Swiss franc.
It has indeed often been cited as being as good as gold. Read more
Macro Risk Advisors, headed by Dean Curnutt, are specialists in derivatives strategy. One of their chief occupations is thus evaluating risk and volatility.
Given that, it’s probably fair to say they’re in a good position to comment on matters “systemic risk” related. Read more
Here’s an interesting observation from a new paper published by the International Journal of Business and Finance (and flagged up by the CXO Advisory Group).
It pertains to the pricing of ETF options, which it turns out are not a like-for-like substitute for index options in the underlying indices they track. Even though you might think they should be. Read more
A bit odd how everyone focuses only on whether or when Italian bond yields will rise 200bps. Isn’t the real problem why a 200bps move would send everything in Europe overboard in the first place?
It’s a single point of failure, no? Read more
Earlier on Monday — Italy’s financial regulator hits the shorts:
Some of the world’s largest hedge fund managers have been left nursing significant losses after two months of volatile markets, reports the FT. Paulson and Co.’s flagship Advantage Plus fund dropped 11.5 per cent in June, according to an investor. The $9bn fund is down 18.4 per cent so far this year. Even veterans of macro trading have been under pressure, with the MLM Macro fund dropping 9.2 per cent for June as at June 24. Hedge funds which sought pickings in the muni bond market fared better, the WSJ reports. Funds which bought up speculative “tobacco bonds” saw returns of more than 10 per cent.
(*Please see below for response from Barclays.)
It was launched with a loud fanfare from Barclays about being an enhanced antidote to the decaying effect of the Vix future roll. Read more
Where “good” = yield from a nice Eonia trade.
Quite frankly, this looks to us like picking up pennies in front of a steamroller. Read more
Here’s an interesting observation from a recently released NBER paper: why are put options on the financial sector index cheaper than those on member banks?
Bryan Kelly of the University of Chicago Booth School of Business, Hanno Lustig of UCLA Anderson, and Stijn Van Nieuwerburgh of NYU Stern, make the following point: Read more
As FT Alphaville has written before, the volatility is out there.
You just have to look for it — and not by glancing at industry-standard, the CBOE Vix index. Read more
Ongoing Greek turmoil. The end of QE2. Slowing growth. An oversupply of credit. A US default.
The list of current developments to keep investors up at night could go on. Read more
When we first mentioned Bitcoin — the virtual currency — it was hovering at $8 against the US dollar.
Last week it reached $28. And we first mentioned Bitcoin last Monday — seven days ago. Read more
I dream of single-name volatility calculations on peripheral eurozone CDS…
Markit’s VolX indices do some of this already, of course. They track realised volatility for European and North American CDS markets using the standard CDX and iTraxx indices. But what they don’t really do is give you a country-by-country breakdown of historical (CDS) volatility for particular countries. Read more
Dylan Grice. Bless ‘im.
The Societe Generale strategist has managed to combine three of our favourite themes — China’s great central economy and big local government debt problems, financial repression and volatility. Read more