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Sunday, October 21

21st Oct - Weekender: Trading & Markets

This week’s edition has sections on United States, Markets, Portfolio/Quant, Trading, High-Frequency/Algo, Hedge Funds and Other. EDIT: Calendar updated.

Coming up soon: Weekender: Regulation & Economics and Weekender: Off-Topics & Views. Don’t miss my previous posts:

Previously on MoreLiver’s:

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Early FOMC previewalphaville / FT
It’s a two-day meeting, but there won’t be a presser afterwards or an updated Summary of Economic Projections when it ends. Just a statement. Still, there are a few things that might happen…

Another fiscal cliff chartalphaville / FT
This one from Goldman economists, showing the projected impact on GDP growth in each quarter from the various provisions.

Are US households about to re-lever?Sober Look
That's the implication of CBO's latest forecast

Which Assets Will Benefit From QE?The Short Side of The Long
Equity market internals continue to deteriorate, especially in the Technology sector, which transitionally has had leading characteristics.

If The Market's Disconnect With Economic Reality is Over, Watch Out BelowZH
It seems, however, that just like AAPL, everyone believes everyone else to be the greater fool - and this time is different.

What is replacing the yen as a "safe-haven" currency?Sober Look

Market Timing and Roulette Wheels RevisitedInvestment Risk and Performance
In a 2001 Financial Analysts Journal article, we analyzed the difficulty of beating a buy-and-hold strategy using active asset switching. In this article, we present updated results. On average, during the 2000–11 time period, beating the market through market timing was difficult but not as difficult, on average, as during the 1926–99 period. The ease or difficulty of beating the market, however, varies tremendously over time. This reality has major implications for performance measurement.

Does Academic Research Destroy Stock Return Predictability?SSRN
We study the out-of-sample and post-publication return-predictability of 82 characteristics that are identified in the academic literature. The average out-of-sample decay due to statistical bias is about 10%, but not statistically different from zero. The average post-publication decay, which we attribute to both statistical bias and price pressure from aware investors, is about 35%, and statistically different from both 0% and 100%. Consistent with informed trading, after publication, stocks in anomaly portfolios experience higher volume, variance, and short interest, and higher correlations with portfolios that are based on published anomalies. Consistent with costly (limited) arbitrage, the post-publication return decline is greater for anomaly portfolios that consist of stocks that are large, liquid, have high dividend yields, and have low idiosyncratic risk. (full pdf from EFA2012)

Modern Portfolio Theory: Bruised, Broken, Misunderstood, Misapplied?CFA Institute
If the global financial crisis has left us with any enduring lessons, it’s that asset return distributions can be significantly skewed and asymmetrical, and that fat tails are the norm rather than the exception. So how can investment practitioners manage this reality?

Davids, Goliaths, and Business CyclesSSRN
Our variable is the annual change in the weight of the largest 250 firms in the aggregate stock market. We provide a theoretical foundation for our predictor's forecasting ability by showing that it is positively correlated with changes in risk aversion in a representative agent model, and hence positively related to expected returns. This positive correlation comes about because our proposed predictor is significantly counter-cyclical; since small and large firms react differently to business cycles, the weight of large firms in the market portfolio increases in recessions and decreases in expansions.

Life on the Big International FrontierTimely Portfolio
Although I have used the Kenneth French data library extensively in various posts, I have not yet used the international data sets paired with the wonderful paper. (includes R code)

Vol of VolFalkenblog
The idea was simple. Instead of sorting by vol, they sorted by vol of vol, and generate a rather large annualized return  difference (10%) between the high vs. low vol-of-vol buckets. It's a bit like the guys at Gillette coming out with 5 blades, applied to volatility.

Why diversification doesn't workThe Physics of Finance
The new paper by physicist Tobias Preis and colleagues makes this point with probably the largest data set used so far, looking at the stocks in the DJIA over about 70 years…a trending market, in either direction, induces significant correlations among the DJIA stocks.

Downside risk and the value
The value anomaly – higher average returns on value as opposed to growth stocks – is a robust phenomenon on equity markets around the world. This column argues that the exposure to downside market risk can explain why value stocks outperform their growth counterparts. The key is to distinguish between 'bad' and 'good' downside market shocks.

Modelling versus sciencepannelldiscussions
Mick Keogh, from the Australian Farm Institute, recently argued that “much greater caution is required when considering policy responses for issues where the main science available is based on modelled outcomes”. I broadly agree with that conclusion, although there were some points in the article that didn’t gel with me.

Mutual fund casinos still skimming billionsMarketWatch
Who loses? You and the other 95 million American investors are losers in this casino. Years ago Bogle figured out how to cut your losses. Here’s his secret: In the real world of games, indexing beats actively managed funds

7th Annual Machine Learning SymposiumNYAS
includes abstracts of papers

NYSE Euronext to launch European retail service: sourcesReuters
NYSE Euronext (NYX.N), the transatlantic exchange group, plans to launch a European trading platform early next year designed to boost volumes from small investors by offering them better prices, according to sources close to the firm.

Beating the Show-OffsThe Reformed Broker
This requires discipline, of the behavioral and emotional sort, way more than it requires any kind of overly acrobatic equity disco…Aspiring Big Shots take note: Learning not to fall (or not to fall too far or too often) is of much greater benefit than learning to dance and prance atop the rigging. On a real ship, you'll never see the captain doing that stuff.

Cowboy EthicsThe View From The Blue Ridge
Goodman’s letters may be somewhat of a chore for those not accustomed to spending weekends reading annual reports, but they are filled with terrific market perspective and investment advice.  I particularly enjoyed the excerpt below

The Great Paper Trading Debate: Helpful or Hurtful?SMB Trading

The Science of Analysis and the Art of TradingDynamic Hedge

The Secrets I Learned from Jesse LivermoreTrader’s Journal

Wrestling With ForecastingThe Capital Spectator
All forecasts are wrong. That’s the nature of trying to look through the fog of uncertainty for guidance on the future. Some forecasts are less wrong than others, of course, but it’s always sensible to assume that the prediction du jour contains noise. That doesn’t mean that forecasting is worthless, but it does make predictions dangerous if you don't look at the estimates in probabilistic terms. But that's hardly standard procedure in the wider world. Thinking through the finer points for forecasting is too often neglected, and sometimes ignored entirely.

A Bias For Real-EstateThe Psy-Fi Blog
You’d expect that if we’re strangely biased when it comes to financial transactions involving the stockmarket that we might also be a bit slanty-brained when it comes to other asset classes as well.  And as real-estate is probably the biggest single investment any of us will ever make it’s probably a prime candidate for a bit of behavioral analysis.

A Tax to Kill High Frequency Trading Forbes

High-Speed Trading No Longer Hurtling ForwardNYT

It’s Time for a Tax to Kill High Frequency Tradingnaked capitalism

Kill switches may be too difficult to implement despite new call by CFTC member, expert saysThomson Reuters

Aussie Stocks Suffer HFT Stop-Run Glitch At OpenZH

Hull Warns of HFT Cancellations & the Illusion of LiquidityAll About Alpha

Latest PDQ Trading Algorithms Take Aim at Costs, SpeedAdvanced Trading
In a low volume equity trading environment, PDQ says its new algos will help retail and institutional investors cut costs and speed up their executions.

Gas Market Stung by Rapid TradersWSJ

High-Frequency Trading a Game-Changer for the Natural Gas MarketAdvanced Trading
Fierce HFT competition has narrowed spreads to virtually nothing in equities, so traders are looking for markets with fatter margins, which makes the commodities markets attractive.

‘Flash Crash’ Reforms Will Fail to Make Markets Safer, Study ClaimsHITC
US ‘flash crash’ reforms will fail to avert another market meltdown unless they are coupled with new “liquidity-based circuit breakers”, researchers claim.

Why there’s less high-frequency tradingFelix Salmon / Reuters

Have Hedge Funds Lost the Magic?Pension Pulse

Hedge Funds & the Global Economic Crisis: Willing Culprits or Easy Scapegoats?all about alpha
At the time and over the last few years, Hedge Funds have received a large portion of the blame for the economic crash. They have often been portrayed as one of the main culprits responsible for causing the global financial crisis.

China’s Sovereign Fund Favors Big Hedge Fund Managers, Fan SaysBusinessweek

Book Bits | 10.20.12The Capital Spectator

Why I Left Goldman Sachs, Chapter Three: “My Alleged Competition”Dealbreaker

What JP Morgan’s release of VaR has in common with sex and computer virusesNick Dunbar

Bond traders: exhausted new stars of financial marketsReuters
Three years of crisis in the euro zone have thrust the once-sleepy government debt market into the public spotlight and transformed the way bonds are viewed, valued and traded.

Ask A Banker: What's A Derivative?NPR

Why are we bailing out the banks? part three – Lies and OppositionGolem XIV

Yes, There Is Such a Thing as a Rational Bubble -- We're in One NowMinyanville
This feels like a bubble. Every investor rationally expects a return greater than his or her investment, yet also knows that the price must eventually crash below his or her purchase price. Before resolving this dilemma, we have to discuss why a price might follow this kind of process. I’ll tackle that next week.

Did Central Bankers Kill The Single-Name CDS Market (For Now)?ZH
Barclays: CDS trading volumes have increased for indices and dropped for single names. We relate this to the current market environment, with an intense focus on political/central bank headlines and high correlation between individual names.

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