Bonds, Interest Rate Regimes & Trading Strategies

Bonds, Interest Rate Regimes & Trading Strategies The past 30 years have been an ideal environment for bond investors in developed countries, as interest rates have been in a secular downtrend (generating steady capital appreciation for bondholders) and the yield curve has generally remained upward sloping (generating consistent positive carry). Today’s multi-decade lows in interest rates have awakened the bond market vigilantes from their long sleep. For a few years now, talk of a “bond bubble” has been popular, and from all sides it seems we hear prognostications of the inevitable catastrophe that is coming for all bond investors when [...]

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A Better Way to Capture Macro Economic Trends

A Better Way to Capture Macro Economic Trends There are many papers written on the randomness of price series and the lack of serial correlation in asset prices. We will not debate the obvious positive results of 40 years of CTA data which shows validity in the basic application of trend following techniques to futures trading. It is hard to refute that, even adjusting for survivor bias, one could have invested in a portfolio of trend following type strategies and produced a portfolio net return with a 0.5 to 0.7 Sharpe ratio and a return profile that is complimentary [...]

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Volatility Forecasting in Futures Markets: A Statistical and Value-at-Risk Evaluation

Volatility Forecasting in Futures Markets: A Statistical and Value-at-Risk Evaluation Volatility forecasting has paramount importance in position sizing and risk management of CTAs. In this paper we examine the out-of-sample forecasts of widely used volatility estimators for the S&P 500 and the 10-Year US Note from a statistical and Value-at-Risk perspective. Although we do not find evidence for a volatility estimator that is statistically superior, we show that the volatility process of each asset is different with asymmetric GARCH models generating superior forecasts for the S&P 500, whereas symmetric GARCH, the Yang-Zhang estimator along with the implied volatility forecasting [...]

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Market Alignment – A Global Phenomenon

Market Alignment – A Global Phenomenon Diversification is well known to provide greater protection against specific market risk than more targeted investment types such as mutual funds, equity indices, or single sector commodity traders - each trying to stake out that point on the efficient frontier where they and their investors feel most comfortable. It is usually accomplished by taking positions in combinations of such assets with fundamentally different risks. This method relies on there being large asset classes with unrelated risk profiles that offer sufficient liquidity for investors to enter and exit meaningful positions. In some strategies such as [...]

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Revised Approaches To Alignment

Revised Approaches To Alignment As investors participate in the financial markets under the influence of readily available credit, leverage, and access to data, they can easily be overwhelmed by the effects of the associated high velocity capital flows. These movements can send waves of volatility and alignment through the equities, commodities, and bond markets in an unpredictable fashion. Even an intelligent investor will be hard-pressed to adequately plan for such unpredictable phenomena. Alignment may take the form of trends migrating slowly and independently across markets, or bubbles and their corrections percolating in the same markets. Managing such risks, even with [...]

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