09
Feb
10

Un refrito: Value at Risk

CSS Analytics tiene un post introductorio sobre Value at Risk,

A technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities.

El foco del articulo es de que tamaño tiene que ser una posición en el mercado. Lo más interesante es, que luego de la critica clásica de que las colas de la distribución de los retornos son más gruesas, propone el siguiente enfoque

Why not simply look at the empirical distribution of daily returns? After all, our own empirical observation tells us that normal distributions are flawed, so why not manage risk based on experience?

In this method we will use an incredibly simple approach:

1) take the daily returns for a given stock, index or strategy

2) compute the 5th percentile of returns (max tail loss)

3) select a budgeted risk level as a maximum daily loss such as 1% (conservative) or 1.5% (aggressive)

4) your position size is the budgeted risk level divided by the absolute value of the max tail loss

5) this position may not exceed 200%

Por ultimo, les dejo la bibliografia que use en un curso de VaR:

Jorion, Philippe. Value at Risk: A New Benchmark for Measuring Financial Risk

Holton, Glyn, Value at Risk, Theory and Practice

RiskMetrics Technical Document. (http://www.riskmetrics.com/publications/techdocs/rmcovv.html)

08
Feb
10

Información y trades

Leyendo un post de Quantivity llamado Paradox of Informedness, me cruce con el siguiente paper:

Fluctuations and Response in Financial Markets: The Subtle Nature of ‘Random’ Price Changes

Abstract:
Using Trades and Quotes data from the Paris stock market, we show that the random walk nature of traded prices results from a very delicate interplay between two opposite tendencies: strongly correlated market orders that lead to super-diffusion (or persistence), and mean reverting limit orders that lead to sub-diffusion (or anti-persistence). We define and study a model where the price, at any instant, is the result of the impact of all past trades, mediated by a non constant ‘propagator’ in time that describes the response of the market to a single trade. Within this model, the market is shown to be, in a precise sense, at a critical point, where the price is purely diffusive and the average response function almost constant. We find empirically, and discuss theoretically, a fluctuation-response relation. We discuss the information content of each trade, and find that it is on average very small.

Link al Paper.

08
Feb
10

Paper: Short Sellers e información

How are Shorts Informed? Short Sellers, News, and Information Processing

Abstract:
We combine a database of short sellers’ trading patterns with a database of news releases to show that short sellers’ trading advantage comes largely from their ability to analyze publicly available information. Specifically, the venerable finding that short sellers’ trades predict future negative returns (e.g., Boehmer, Jones, and Zhang (2008) and Asquith, Pathak and Ritter (2005)) is more than twice as strong in the presence of news stories. We show that the most profitable short sales are not from market makers, but from clients, and we show that these client short sales are particularly profitable in the presence of news. Furthermore, we show that the ratio of short sales to total volume is nearly constant through news periods, and when we do find differences between the timing of short sellers’ trades and the overall market, we find that relative to other types of trading there is a significant increase inshort selling after news stories. We find that short sellers’ ability to predict returns is concentrated in many of the news categories in which short sellers trade relatively late; a finding consistent with the idea that short sellers’ advantage arises from their ability to process publicly available information.

Link al Paper

06
Feb
10

HFT: opinión de la Chicago Fed

El Banco de la Reserva Federeal de Chicago (Chicago FED) en uno de sus usuales ensayos trata el tema de High Frequency Trading (HFT), Controlling Risk in a Lightning-Speed Trading Environment

A handful of high-frequency trading firms accounted for an estimated 70 percent of overall trading volume on U.S. equities markets in 2009. One firm with such a computerized system traded over 2 billion shares in a single day in October 2008, amounting to over 10 percent of U.S. equities trading volume for the day. What are the advantages and disadvantages of this technology-dependent trading environment, and how are its risks controlled?

El trabajo hace hincapié en las posibles perdidas ocasionadas por este tipo de trading:

The high-frequency trading environment has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment.

Para terminar, la bibliografia de este ensayo no tiene desperdicio, cita un paper realizado en el 2007 llamado Does Algorithmic Trading improve Liquidity? y una nota periodistica, tambien del 2007, Error in Singapore Forced Unwinding of 110,000 trades.

06
Feb
10

Paper: Yield Curve y Retornos

Yield Curve Predictors of Foreign Exchange Returns

Abstract:
In a no-arbitrage framework, any variable that affects the pricing of the domestic yield curve has the potential to predict foreign exchange risk premiums. The most widely used interest rate predictor is the difference in short rates across countries, known as carry, but the short rate is only one of many factors affecting domestic yield curves. We find that in addition to interest rate levels other yield curve predictors have significant ability to forecast the cross section of currency returns. In particular, changes of interest rates and term spreads significantly predict excess foreign exchange returns, exhibit low skewness risk, and are lowly correlated with carry returns. Predictability from these yield curve variables persists up to 12 months and is robust to controlling for other predictors of currency returns.

Link al Paper

05
Feb
10

Paper: Mutual Funds y performance

Do Past Mutual Fund Winners Repeat? The S&P Persistence Scorecard

Abstract:
The phrase “past performance is not an indicator of future outcomes” is a common fine print line found in all mutual fund literature. Yet due to either force of habit or conviction, both investors and advisors consider past performance and related metrics to be important factors in fund selection.
Does past performance really matter? The semi-annual S&P Persistence Scorecard seeks to track the consistency of top performers over three- and five-consecutive year periods, and measure performance persistence through transition matrices for three- and five-year non-overlapping holding periods. As in our widely followed Standard & Poor’s Indices Versus Active Funds (SPIVATM) Scorecards, the University of Chicago’s CRSP Survivorship Bias Free Mutual Fund Database underlies our analysis.
Very few funds manage to consistently repeat top-half or top-quartile performance. Over the five years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods. No large- or mid-cap funds, and only one small-cap fund maintained a topquartile ranking over the same period.
Looking at longer term performance, 24.32% of large-cap funds with a topquartile ranking over the five years ending September 2004 maintained a top-quartile ranking over the next five years. Only 16.39% of mid-cap funds and 27.06% of small-cap funds maintained a top-quartile performance over the same period. Random expectations would suggest a repeat rate of 25%.
Our research suggests that screening for top-quartile funds may be inappropriate. A healthy plurality of future top-quartile funds comes from the prior period’s second, third and even fourth quartiles. Screening out bottom quartile funds may be appropriate, however, since they have a very high probability of being merged or liquidated.

Link al Paper

05
Feb
10

Deuda Soberana: Tracking the Short Sellers

Asi se llama un trabajo de Data Explorers, de donde sale el siguiente grafico.

03
Feb
10

Opciones: mirar los detalles

Eso es lo que recomienda Mark Wolfinger en un post -de su blog Options for Rookies- cuando responde las inquietudes de un lector.

I am always surprised when someone comes to me with this (or similar) question.  No one in his/her right mind would EVER – under ANY REASONABLE CIRCUMSTANCES – exercise an option when it ‘reaches it’s strike price. I just cannot comprehend from whence that idea originates.  I would be extremely appreciative if you can provide a clue. Just look at any stock and the options on that stock.  Notice that there are in-the-money calls and puts. Notice that the open interest of these options is not anywhere near zero.  Zero would be the open interest if everyone exercised those options.

(…) Do you see that the slightly ITM calls and puts carry a time premium in addition to intrinsic value?  Anyone who owns that option and no longer wants to own it – would SELL and collect the full option premium.  Exercising allows the capture of only the intrinsic value and the time value is tossed into the trash.  No one would do that.

03
Feb
10

Paper: Retornos y la Hipotesis de Mercados Adaptativos

Stock Return Predictability and the Adaptive Markets Hypothesis: Evidence from Century Long U.S. Data

Abstract:
We study return predictability of the Dow Jones Industrial Average indices from 1900 to 2009. We find strong evidence that time-varying return predictability is driven by changing market conditions, consistent with the implications of the adaptive markets hypothesis. During market crashes, no return predictability is observed, but an extreme degree of uncertainty is associated with return predictability. During fundamental economic or political crises, stock returns have been highly predictable with a moderate degree of uncertainty. During economic bubbles, return predictability and its uncertainty have been smaller than normal times.

Link al Paper

02
Feb
10

Paper: Implied Volatility y Risk Premia

Option Implied Volatility Factors and the Cross-Section of Market Risk Premia

Abstract:
The main goal of this paper is to study market volatility risk premia. I develop a multifactor model by proposing a pricing kernel, where the market return, the diffusion volatility and the jump volatility are fundamental factors that change the investment opportunity set. Based on estimates of the diffusion and jump volatility factors using S&P500 index returns, options and VIX, the paper finds negative market prices of volatility factors in the cross-section of stock returns. The findings are consistent with risk-based interpretations of the value and size premia and indicate that the value effect is mainly related to the diffusion volatility factor, whereas the size effect is associated to both the diffusion and jump volatility factors. The paper also finds that using market index data alone may yield counter-factual results.

Link al Paper




 

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