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Correlation Breakdown

Posted on January 28, 2018 By 
The US equity market just reached new highs, and it broke many records.  For example, Bloomberg reported that the US market had not been overbought like this in 21 years. The S&P 500 Index’s superlative start to 2018 is making a contrarian technical indicator look silly. The benchmark gauge is …
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Liquidity Risk and Exchange Traded Funds

Posted on December 22, 2017 By 
The sell-off in the high yield bond Exchange Traded Funds space last month reminds us of an important risk factor: liquidity. But what exactly is liquidity risk? According to Aleksander Kocic, derivatives strategist at Deutsche Bank AG, Liquidity transforms the risk of default (the ability that the debtor may not …
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Volatility, Skew, and Smile Trading

Posted on November 19, 2017 By 
Peter Carr recently gave a talk on volatility trading at the Fields institute. Summary: In general, an option’s fair value depends crucially on the volatility of its underlying asset. In a stochastic volatility (SV) setting, an at-the-money straddle can be dynamically traded to profit on average from the difference between …
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Is Value at Risk a Good Risk Measure?

Posted on September 30, 2017 By 
Value at Risk (VaR) is an important risk measure that large financial institutions use for managing the risks and allocating capital. Wikipedia defines VaR as follows: Value at Risk (VaR) is a measure of the risk of investments. It estimates how much a set of investments might lose, given normal …
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What Do Creators of the VIX Think of Volatility?

Posted on September 16, 2017 By 
The volatility index was created more than 30 years ago. Since then it has become a favorite tool for both speculation and risk management.  There is now strong evidence that VIX futures and related exchange-traded products are changing the market dynamics. Specifically, in the early days of the VIX, the …
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Credit Derivatives-Is This Time Different?

Posted on August 30, 2017 By 
Credit derivatives, the types of complex financial instruments that were responsible for the 2008-09 Global Financial Crisis, are back to the news. Two months ago, Frances Schwartzkopff of Bloomberg reported, A complex credit product that regulators are still trying to get their heads around is proving popular with some big …
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VIX Futures Leads Cash Market: Tail Wags Dog

Posted on August 14, 2017 By 
Last Thursday witnessed, again, another dramatic increase in volatility. The volatility index VIX spiked 44 percent to 16.04%, its highest daily close for the year. As shown below, the VIX futures term structure inverted in the short end. Two days before the event, Helen Bartholomew of Reuters warned that the …
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Do Quantitative Trading Models Work?

Posted on July 27, 2017 By 
Quantitative trading has become a topic du jour lately. Many investors have been considering allocating more capital to quantitative funds. However, not all experts share the same opinion regarding the merits of quantitative strategies. There are even quants among the skeptics. Emanuel Derman is one of the most respected experts …
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How Long Will Low Volatility Last?

Posted on July 11, 2017 By 
Will this low volatility persist and can a large market decline happen in this environment? Aaron Brown recently published an article in which he pointed out that a large jump in realized volatility happens only when the VIX is above 20. …the important thing is that there aren’t big surprises …
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