This week's sections are Markets, Trading, Portfolio and Other.
Previously
on MoreLiver’s:
Weekender: Weekly Support (updated!)
MARKETS
Wash, rinse, repeat? – Humble
Student
The market's ups and downs are getting more
violent and the time frame of the moves are getting more compressed.
'Micro' Equity Focus Is Shifting To 'Macro'
Bond Reality – ZH
Goldman
Sachs measures and comments market impacts of different economic indicators: The equity market shows about twice as much
sensitivity to macro data as it did in the years before the financial crisis.
We suspect this will remain the case until the US and global economic
outlook becomes considerably clearer.
"It’s Been A Fun Ride, But Prepare For A
Global Slowdown"
– ZH
Bank of
America’s report looks at the Fed’s and ECB’s choices and gives hints on what
things to look at when measuring the effectiveness of the policies.
Risk premium or deflation charge? – alphaville
/ FT
Bond yield weirdness isn’t really evidence of a
disaster premium being applied. It’s much more likely that the premium reflects
a deflation charge — as well as the beginnings of a negative carry universe.
Joris speaks to a young banker about the
backgrounds of traders and the rewards and pitfalls of being 'plugged in'
Top quant to next generation: you suck – alphaville
/ FT
Danske Bank’s
head quant: “I think the problem is due
to fundamental flaws in our education system: it is like the current generation
has been indoctrinated into not performing any independent thinking at all. In
their small minds, knowledge and understanding can be skipped because the
answer to any problem can be found on the internet or in some book…“
Behavioral Economics, Neuro-Finance, &
Faulty Financial Decision-Making – The
Big Picture
27-slide
presentation
19 Notable Quotes from the Book “Hedge Fund
Market Wizards” – Ivanhoff
“All markets look liquid during the bubble
(massive uptrend), but it’s the liquidity after the bubble ends that matters.”
Teaching kids to gamble – Magic,
Maths, Money
I do a workshop of couple of hours each summer
with kids who have finished their Standard Grades (GCSEs in England, i.e they are 16)
Bond Trading Loses Some Swagger Amid Upheaval – NYT
“It was
a rock-solid kind of career not too long ago,” said Lou Ricci, a co-founder of
the Hagan-Ricci Group, a headhunting firm. “You give me a really good bond
trader right now, I probably can’t find them a job.”
Nine Financiers – The
Reformed Broker
The life of a professional speculator is an
unpleasant one, filled with highs and lows but ultimately unsatisfying and, in
all probability, mentally ruinous. Look
no further than the example of history's greatest speculator for proof of this.
Things Investors Should Hate – The Psy-Fi Blog
Checklist of Errors – The Big
Picture
Many high-quality, experienced advisors tend
not to do a great deal of mentoring (though there are exceptions) because the
turnover among new advisors is so high it isn’t a good investment of time. Given that dynamic, I thought I would try to
set down some advice to a new advisor to try to spare them, and their clients,
some of that learning curve.
Optimizing the Investment Process – CFA
Institute
Michael Mauboussin’s Strategies for Making
Decisions under Uncertainty
PORTFOLIO
'Sell in May and Go Away' Just Won't Go Away – SSRN
We perform the first out-of-sample test of the
Sell in May effect studied by Bouman and Jacobsen (American Economic Review,
2002). Surprisingly to us, the old adage "Sell in May and Go Away"
remains good advice. Reducing equity exposure starting in May and levering it
up starting in November persists a profitable market timing strategy. The
economic magnitude of the effect is the same in- and out-of-sample: on average,
stock returns are about 10 percentage points higher in November to April
semesters than in May to October semesters.
Does the Shiller-PE Work in Emerging Markets? – SSRN
We test the reliability of the Cyclically Adjusted PE (CAPE) or Shiller PE as a forecasting and
valuation tool for 35 countries including emerging markets. We find that the
Shiller-PE is a reliable long-term valuation indicator for developed and
emerging markets and we use the indicator to predict real returns on local
equity markets over the next five to ten years.
Send in the Clones? Hedge Fund Replication
Using Futures – SSRN
Clone returns have high correlation with their hedge fund targets, indicating replication is possible. Clones also have high correlation with a buy-and-hold investment in stocks, however, and neither the targets nor their clones demonstrate successful time variation in factor loadings.
Clone returns have high correlation with their hedge fund targets, indicating replication is possible. Clones also have high correlation with a buy-and-hold investment in stocks, however, and neither the targets nor their clones demonstrate successful time variation in factor loadings.
Will My Risk Parity Strategy Outperform? – Turnkey
Analyst
We gauge the return-generating potential of
four investment strategies: value weighted, 60/40 fixed mix, unlevered and
levered risk parity. We have three main findings. First, even over periods
lasting decades, the start and end dates of a back-test can have a material
effect on results; second, transaction costs can reverse ranking, especially
when leverage is employed; third, a statistically significant return premium
does not guarantee outperformance over reasonable investment horizons.
The Five Dimensions of Risk – Rick
Ferri
The FF 5 Factor Model includes three variables
that explain stock returns and two variables that explain bond-market returns.
Stock variables are overall market risk (beta), a firm size risk (size), and a
fundamental risk measured by book-to-market (BtM). These three risk factors are
the basis for the well-known Fama-French Three Factor Model. In addition, bonds
have two common risk factors: maturity risk and credit risk. These are also
referred to as known as term risk and default risk respectively.
Value Matters: Predictability of Stock Index
Returns – SSRN
further empirical support to Shiller’s test of
the appropriateness of prices in the stock market based on the Cyclically
Adjusted Price Earnings (CAPE) ratio…in our model, the stock prices dynamics
may generate bubbles and crashes in the short and medium run, whereas for
future long-term returns the valuation ratio remains a good predictor.
OTHER
Book Bits | 7.28.2012 – The
Capital Spectator
Regulations led to creation of huge risk
management bureaucracies in banks, staffed mostly by people with no experience
in taking risks. These organizations encouraged undercapitalized risk
taking—overreaction to short-term gains and losses. They insisted on an equity
cushion for losses that was going to disappear any time it was needed. If there
is a quant culprit to the financial crisis, this is the quantitative
misunderstanding that killed us. (Part
1 and Part
2)
Book Review: Visual Guide to Financial Markets – The
Aleph Blog
This book is best for those that have access to
a Bloomberg terminal, but are not expert in using it. Second best, it could
help those without a Bloomberg terminal, but want to learn the basics of
investing.