Browsing: Finance & Economics

Since, as everyone says, “past performance is no guarantee of future results,” a history of close correlation between two assets, or between a single asset and a benchmark, is no guarantee of future correlation. The threat that a correlation upon which a particular investor has relied will cease to applyRead More

Bitcoin derivatives act a lot like the derivatives of other asset classes. Two scholars at the University of London recently looked at bitcoin’s “volatility smiles and skews” as found in the short and long dated maturity of options traded at the Deribit Exchange in 2019. Helyette Geman and Henry Price,Read More

By Bill Kelly, CEO, CAIA Association The saying “fool me once shame on you, fool me twice shame on me” has its origins all the way back to the 1600’s when most of the carbon now in our atmosphere was “safely” encased in limestone and other rock formations within theRead More

Last month saw an extraordinary spike in the interest rates of the repo market—the market that consists of the (very) short-term, usually the overnight, borrowing of government securities. Hedge funds, along with other institutions such as trading firms and banks, regularly hand over US Treasury bills and the like inRead More

The “volatility effect,” also known as the “low-risk effect,” is the subject of a new paper from Robeco. The gist of the “effect” is this: low-risk stocks “should” show a lesser return than high-risk stocks. The Capital Asset Pricing Model predicts a linear relationship between the risk of a securityRead More

By Bill Kelly, CEO, CAIA Association How do you turn a millennial into a capitalist? Sell her SNAP in the post-IPO market. A little hindsight here shows how ridiculous this all looked. The initial sellers of the shares were the founders and their VCs (just under 30% of the offering),Read More

One regular theme of coverage and analysis that involves the listed equities, including analysis of the pursuit of alpha, is that many of the users of these markets claim, often quite obstreperously, that the exchanges charge more than makes sense and some restructuring of the industry is in order. TheRead More

A report from CREATE in collaboration with BNY Mellon looks at two related megatrends in investing—climate change and artificial intelligence. It asks in each case: how is this trend perceived in terms of opportunities and risks? What are the specific investment issues involved or solutions likely to be adopted? AndRead More

Initial Exchange Offerings, that is, offerings administered by a crypto exchange, on behalf of a startup—where the startup is trying to raise funds with newly issued tokens—has developed as an alternative to an older model, the Initial Coin Offering, where participants make their contributions to a smart contract. Hirander MisraRead More

David Stevenson, a US District Court Judge for the Northern District of Texas, has presented his analysis of the  differences between the law in the United Kingdom and the United States concerning “a debtor’s ability to approve a restructuring arrangement over the objection of creditors that disapprove.” This is moreRead More

A new paper looks at how hedge funds adjust their information acquisition and trading behavior as analyst coverage changes—and more specifically, when certain stocks cease to be covered by certain analysts. These authors considered the hypothesis that, faced with a murkier environment, hedge funds might become more cautious, reducing theirRead More

By Nicolas Rabener of FactorResearch (@FactorResearch) INTRODUCTION When pitching an investment product with a backtested history the frequent response from potential investors is that they have never seen a bad backtest. Naturally this is true as there is no point in marketing a strategy with a poor backtest as investorsRead More

Neuberger Berman has long pressed the investment thesis that the prolonged recovery from the depths of the Global Financial Crisis would end, when it ended, with a “soft landing.” There will be a slowing of growth, and with that an increase in volatility, but it need not involve a “hard”Read More

A new paper takes an experimental look at “Active Risk Budgeting,” a method of portfolio construction that looks to build upon older and sometimes passive risk budgeting approaches, adding enough active management to allow the risk budget to change over time. For example, an institution might want its risk budgetRead More

A recent publication by two executives of State Street Associates identifies a new factor in currency turns, which it calls the “equity differential.” In effect, it argues for the viability of a trading strategy based on this factor. The paper argues that the differential in trailing equity market performance stronglyRead More

The Securities and Exchange Commission issued three no-action letters on the issue of research payments, in light of developments on that issue in Europe in 2017. Specifically, they dealt with the cross-border of Europe’s rules (MiFID II), which were scheduled to take effect, and which did take effect, on Jan.Read More

A lot of hopes have been placed on changes in market tick sizes. In the 1990s there was a big push to reduce the tick sizes of securities, allowing them to get down to one cent or fractions thereof. In the new millennium came a sense of regret. Observers suspectedRead More

There are reports that Google is preparing an announcement of “quantum supremacy” for later this year. If true, this is the biggest tech story since the transistor replaced vacuum tubes. It could be a disruptive development for just about every business with an IT department. Among much else, quantum supremacyRead More

On Feb. 1, ICE Futures US Inc., informed the Commodity Futures Trading Commission that it was instituting a new “speed bump,” formally called the Passive Order Protection (or POP) Functionality for its gold daily and silver daily futures markets. The idea of POP is to limit the advantage that canRead More

By Mark Shore As the discussions of trade wars and tariffs persisted throughout 2018 and into 2019, it may have influenced a sense of uncertainty in the global financial and commodity markets as companies might have to rethink their supply chains and manage potential disruptions and at least in theRead More

The outperformance of the size, value, and reversal factors is strong, but the momentum factor, which has performed well in the U.S., does not work in China. This is the conclusion of a new white paper published by  Neuberger Berman about quantitative investing in China A shares. It has aRead More

Renewable energy, however defined, is widely seen as a sustainable and socially responsible (and, if the investing is done right, very profitable) addition to one’s portfolio. Indeed, such entities as the Institute for Energy Economics and Financial Analysis, an Ohio based research-and-analysis shop, exist to show that renewables are theRead More

Three scholars associated with the University of Wollogong, Australia, recently published a paper on the contribution of high-frequency traders to the absorption of new information by the markets, especially in relation to the prices of interest rate derivatives. The study is the work of Alex Frino, Michael Garcia, and IvyRead More

Tatja Karkkainen, a scholar on financial technology who is pursuing a PhD at the University of Glasgow, has written an illuminating paper on price discovery in the bitcoin markets. She begins with the observation that CBOE and CME introduced bitcoin futures in December 2017, “as the first institutional standard cryptocurrencyRead More

Three scholars affiliated with JP Morgan Chase have written a paper on hedge fund behavior ahead of meetings of the Swiss National Bank, with the idea of shedding light on the consequences of the timing of central bank announcements more generally. They conclude that the SNB contributed to the volatilityRead More

The illiquidity premium is one of the most frequently discussed and hotly disputed subjects in financial economics. Speaking broadly, an investment is not a checking account. One generally cannot just “get the cash back” at a moment’s notice, by visiting some equivalent of an ATM. How long will it takeRead More

The Securities and Exchange Commission recently imposed a stay on part of its transaction fee pilot (TFP). There is understandably a good deal of debate about the significance of this stay. The TFP, initiated in December 2018 with the expectation that it would run for at least one year, andRead More

Many high-frequency trading (HFT) firms have disappeared into larger firms as merger activity has increased recently. Those acquired include Chopper, Infinium, Teza, RGM Advisors, and Sun Trading. It also includes Getco, the Chicago-based firm founded in 1999 by two former floor traders that almost defined the field for some time.Read More

By Diane Harrison Hedge fund investors and marketers seem glad to let go of 2018 and its disappointing finish, down 3.41%, a marked decline from 2017’s 11.99% gain. And yet, 2019 markets started the year with an upswing, reflecting the hope that springs eternal in capital raising. Alternatives managers willRead More

By Nicolas Rabener of FactorResearch INTRODUCTION Investors fear black swan events, although it can be argued that this fear is irrational. The black swan theory is a metaphor that describes a surprise event that has a major impact and is often rationalized with hindsight. A recent example would be theRead More

Two scholars working with Bayesian probability theory recently published a fascinating discussion of market timing and portfolio efficiency. They have proposed what they call a “hierarchical ensemble learning portfolio.” Yes, that sounds rather heavy on the jargon. We’ll break it down a bit in what follows. The authors of theRead More

Algorithmic trading may fairly be said to have conquered the public equities world, although there are still pockets of resistance and related controversies. The robots have now turned their attention to the bond markets. Bond markets are different from stock markets in a lot of ways, and many of theseRead More

One startling fact about the new book, How Global Currencies Work: Past Present and Future, is to be found in the index. One would normally expect, from a title and subtitle like that, that there would be a lot of pages enumerated at the index heading “Bretton Woods.” After all,Read More

The NYSE, on Thursday, Feb. 14, Nasdaq, and Cboe Global Markets (the following day) have united to bring lawsuits against the Securities and Exchange Commission to stop its transaction fee pilot. These are the three largest US equity exchanges and their attitude toward their regulator is usually one of cooperation.Read More

A new paper from State Street Global Advisors takes a sociological approach to the search for alpha in emerging market nations. It contends that the “major theme for growth” in the emerging markets moving forward will be “based on the rise of the middle class and rising consumption in theseRead More

Given a long wave of scandals that lasted from 2008 until 2012, most of the derivatives industry, and most of its regulators, have agreed that the London Interbank Offered rate [Libor] ought to be replaced by a more tamper-resistant mechanism. Surely there must be an index that will measure theRead More

A sound “portfolio optimization strategy” is one that takes into consideration how its assets are behaving in the bad times, those that represent the left-side tail of the bell curve. This is not all that novel an idea, but Maria Kartsakli and Felix Schlumpf, Zurich Insurance Company executives, give itRead More

The bosses of a publicly listed company had better care what their employees think about their company, because “Mr. Market” cares. That is one natural inference from a new paper by Jinfei Sheng, of the Paul Merage School of Business, University of California, Irvine, who looks at how the opinionsRead More

Public pension funds in the United States invest in infrastructure. Unfortunately, they aren’t very good at it. A recent working paper of the NBER concludes, indeed, that public pensions are so bad at such investments that they—and thus either the public or its retirees or both—are unwittingly subsidizing infrastructure projects.Read More

A new book by Hassan Malik may serve as a caution for alternative investors operating in the emerging markets, in the form of a case study about the politics of default. Malik is an emerging markets strategist at Ned Davis Research in London. His new book, Bankers and Bolsheviks, beganRead More

On Jan. 11,  the CFA Society India hosted the 9th Annual India Investment Conference in Mumbai. CAIA was a platinum sponsor of this event.  The theme of this year’s IIC was “investing insights for uncertain times.” Nick Pollard, Managing Director, Asia Pacific at CFA Institute, kicked things off with aRead More

By Nicolas Rabener, CAIA, Factor Research Summary: China exhibits the world’s highest corporate debt as % of GDP However, Chinese stocks are not significantly more levered than U.S. stocks Asset and debt growth has stalled in 2018, likely indicating an economic slowdown INTRODUCTION The McKinsey Global Institute published an influentialRead More

Understanding of the “Markowitz problem” has changed in the 60+ years since Harry Markowitz’ publication of an article in the Journal of Finance that outlined the basics of modern portfolio theory. The problem is that portfolio theory requires an investor to estimate risk, return, and correlation from market data, meaningRead More

A new working paper from the Federal Reserve Bank of Chicago looks at the real risk-free interest rate over the last 30 years, where it has been trending, and why that trend hasn’t had the consequences one might intuitively have predicted. The paper, Accounting for Macro-Finance Trends, is the workRead More

Five stories stand out as the dominant stories for and about pursuers of alpha in the year just passed. There is nothing arbitrary about the list below. We admit, though, that the order in which we present them is arbitrary: that is, it is not a ranking, and it isRead More

It was just about 10 years ago (Dec. 10, 2008) that Bernie Madoff acknowledged to his sons, Mark and Andrew, that he had “absolutely nothing left” of the funds that had been entrusted to him; that the investment fund that bore his name was “just one big lie.” There isRead More

By Bill Kelly, CEO, CAIA Association One hundred and fifteen years ago today two Wrights tried to make it right when it came time to ponder the prospect of flying the friendly skies. On that day in an open field in a place called Kill Devil Hills, the first recorded airplane flight took off and safelyRead More

Assets under management for Asia’s managers have ballooned in the last 10 years, with an increase on average of 9% annually. Performance has been such as to encourage inflow. A recent study by McKinsey suggests that the “good times” will “keep rolling.” But it also cautions that the opportunities inRead More

By Nicolas Rabener, CAIA, Factor Research Summary: Common equity factors generated attractive risk-adjusted returns in the Chinese stock market Factor performance in China often mirrors global factor performance Indicates common factor drivers that permeate even emerging and isolated markets INTRODUCTION Economic news like changes in GDP growth are frequently usedRead More

This has been a terrible year for cryptocurrencies. Bitcoin, the flagship for the asset class, peaked in the middle of December 2017 at a value of above $17,000. By the end of January this year, it was below $10,000. By September BTC had settled into a price range of $6,500.Read More