In the previous posts entitled Where are the Cheap Hedges for Equity Portfolios? Now Is The Time to Hedge, But The Cost of Insurance Can Be Expensive, we outlined some solutions for finding inexpensive hedges in this low volatility environment. In this post we will continue to explore some more opportunities, and elaborate on additional…
Read More How to Find Cheap HedgesLast week, the volatility index hovered around its lower range. However, the low volatility phenomenon is occurring not only in the equity space, but across the board, from fixed income, to currency, to commodity markets around the world. Still, experts are divided whether this current low volatility is pricing in the risks correctly. Steve Heston,…
Read More “It might be that VIX is fairly priced for the first time, and that risk is fairly low”The asset under management (AUM) of the Exchange Traded Fund (ETF) industry has grown substantially in the recent years. From 2007 to the end of 2016, AUM increased from $851 billion to $3.546 trillion. Investors have been enjoying many benefits, especially the low cost, offered by ETFs as a result of this explosive growth. However,…
Read More Risks Involved When Investing in Exchange Traded FundsLast week, professor and Nobel Laureate Robert Shiller came out with a statement regarding the market high valuation. He referred to the CAPE ratio which is at 29 at the moment and is considered high. However, he also said that the high CAPE ratio does not necessarily mean investors should sell stocks right now. Still,…
Read More Where are the Cheap Hedges for Equity Portfolios?Last week, after the French election, the VIX plummeted and started its journey into the low-volatility regime again. Consequently, volatility selling strategy began gaining traction. However, FT.com published a warning Jim Keohane, the chief executive of the Healthcare of Ontario Pension Plan, compares selling volatility to picking up dimes in front of a steamroller. “You…
Read More Why is Volatility so Low?More and more investors are using the power of computing technologies and quantitative techniques to manage their portfolios these days. They believe that quantitative trading can help reduce the PnL volatility resulted from emotional decision making and thus increase the consistency of returns. However, sometimes the machine beats the man, and sometimes it does not.…
Read More Quantitative Trading: VIX Factor Model and Trend FollowingIn a previous post, we examined the relationship between the Credit Default Swap (CDS) and equity volatility, and argued that there is a strong correlation between them. But like any relationship in financial markets, this one can break down and divergence can happen. For instance, last month we noticed that CDS in Asia and Australia…
Read More Divergence Between Credit Default Swap and Equity VolatilityYesterday the Federal Reserve Chair Janet Yellen said at a University of Michigan event that the Fed planned to raise short-term interest rates. “I think we have a healthy economy now … but it’s been a long time coming,” Yellen said. Yellen said the current unemployment rate of 4.5% is “even a little bit below”…
Read More Another Look at Prepayment Risk of Mortgage-Backed SecuritiesAfter an increase in volatility, equity markets seem to be going back into the state of calmness. Additionally, with Easter coming up, volume and volatility are expected to remain low, at least for a couple of weeks. However, beside the equity world, the credit market is experiencing a tightening as well. The graph below shows…
Read More Relationship Between Credit Default Swaps and Equity OptionsEquity markets were relatively calm after the US election. The recent weeks, however, have seen some increase in volatility. Is this just a blip or the start of a volatile period? Nobody knows the exact answer. But Gregory Meyer et al of FT.com reported that there are firms, notably DRW, based in Chicago, that already…
Read More Hedging in the Mortgage Backed Securities Market Can Increase Volatilities