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Strange Things That Have Been Happening in Financial Markets
- roymurdock 11y ago> The number of assets registering large moves—four or more standard deviations away from their normal trading range—has been increasing. Such moves would normally be expected to happen once every 62 years. This is very troubling. It means traditional models are not working to capture the market correctly at the moment. It was a leading indicator for the 2007 financial crisis - 3 sigma events happening with increasing frequency that were ignored because there were profits to be made from poor risk management.
- deleted 11y ago[deleted]
- kazagistar 11y agoSo the real question is, if you think the market is gunna go down in flames soon, how do you short... everything?
- melvinmt 11y agoYou buy an ETF that shorts the S&P500: http://www.proshares.com/funds/sh.html http://www.proshares.com/funds/sh.html
- Pyxl101 11y agoIs there a way to bet that something will grow more slowly than normal? S&p 500 has been growing about 10% per year. How would I "short" it and bet that it will grow 5%? Can such a position be constructed?
- yummyfajitas 11y agoStraddle option on SPY with K=1.05 x SPY today. https://en.wikipedia.org/wiki/Straddle https://en.wikipedia.org/wiki/Straddle If you want to get clever and derisk a bit you can also limit your losses in the tails with way out of the money calls and puts.
- um_ya 11y agoIf you have never traded before, don't try to jump in without knowing all the possibilities. A more likely scenario to unfold, is that Janet Yellen does NOT raise interest rates and instead, starts QE4. In this scenario, the dollar will tank and stocks (priced in dollars) will go up. Just be cautious.
- lujim 11y agoBe careful with inverse ETFs especially if they are leveraged to move 2x or 3x in the opposite direction of the underlying index. They try to be inverse for each single trading DAY so if the market moves back and forth you can take geometric losses. For instance, if you have 100 dollars in an inverse etf and the market goes up 10% your inverse etf will go down to 90 dollars. The next day the market drops 10% so you think "hey my inverse ETF will go up 10% so I'm back to where I started" Nope a 10% gain on 90 dollars puts you at 99 dollars. If the market moves sideways for a while your investment will continuously decline.
- finance-geek 11y agoSo many ways... For small timers: inverse ETFs, put options, CFDs (for non-US folks) For big timers: the above plus: short futures, OTC options, equity swaps, CDS, plus anything bespoke you can afford
- rsync 11y agoI haven't looked into it in years, but my recollection is that you don't buy the inverse ETF, you short the corresponding long ETF. That's because there is inherent "decay" in the price of the ETF - if the market just keeps going sideways, the ETF slowly trends downward over time. So if you buy the inverse ETF and the market doesn't go up at all, you still don't have a profitable trade - you should short the long ETF. Is that still the case ?
- um_ya 11y agoOr, just buy the ETF that preforms well when there is an economic downturn. Possibly GDX and GDXJ (gold mining ETFs).
- rsync 11y agoNo, you're missing the point. If my understanding is still current (I suspect it is) these ETFs "decay" over time. Which means you can be "right" but if what you're right about doesn't happen fast enough, you still lose money. That's why people suggest shorting the ETF that is opposite your prediction.
- zeckalpha 11y agoWait for it to tank, then buy.
- shlomo_goystein 11y agoGood goy!
- vasco 11y agoCatching a falling knife is always a good idea.
- lmm 11y agoHigh reward goes with high risk. I honestly think there's a gap in the market for a falling knife fund.
- simonh 11y agoWhereas catching knives thrown on upward trajectories...
- MoOmer 11y agoWould happen if you were shorting
- zeckalpha 11y agoWhen you catch all the falling knives with an index fund, some will sink, but most will rebound.
- lmm 11y agoThere's Taleb's "tail risk fund".
- bcg1 11y agoLook at Exter's pyramid and decide which level(s) can withstand whatever you flames you think are coming, and then divide your assets among those levels in proportion with how bad you think things might get. https://en.wikipedia.org/wiki/John_Exter https://en.wikipedia.org/wiki/John_Exter
- KMag 11y agoThe 62 year estimate is based upon an assumption of normally distributed data. Everyone in the industry knows the distributions are significantly fat-tailed. Maybe things are getting more volatile, but the 62 year estimate is just mumbo jumbo. Edit: also implicit in the 62 year estimate is constant volatility, but the same article mentions changes in the volatility of volatility... third order changes in something he was assuming was constant earlier.
- finance-geek 11y agoTotally on point. That is why 100-yr events seem to happen every 7 or 8 years :-) Normal distribution assumptions are great for coursework, terrible when you are managing real money.
- shlomo_goystein 11y agoThings happen every 7 years because of the Shmitah. Call the jews and tell them to learn from history! They've been crashing markets since the tower of babel. And while you're at it, call Soros and tell him to take his ethnocidal hands off Europe. And call the FBI and report him. Shalom!
- shlomo_goystein 11y agoGoyim are gonna hand all their possessions over to the nation of Israel after the big Shmitah crash... at a 90% discount! Good luck suckas!
- sfilipov 11y agoSlightly off-topic but we are really bad at predicting these "very unlikely events" that actually happen more often than expected. Whenever I hear a similar story, I am reminded of the 3 nuclear reactor disasters (Three Mile Island, Chernobyl, Fukushima), each of which shouldn't have happened in 15000 years.
- iaw 11y agoWhere did you get the 15,000 years number? I have never seen that before and would love it if you could provide more resources.
- sageikosa 11y agoCentral planners delegating to econometric models that are based on statistical historical patterns wonder why the "system" doesn't do what they expect; either its time for some new theories, or rediscover some economic schools of thought that have consistently rejected the historical schools.
- HiLo 11y agoHow do you know options skews aren't already pricing this factor in? Usually this effect is counterbalanced by the vol smile. Edit: vol smile is how options very far away from the strike tend to be priced at a premium versus what black scholes would suggest. The sellers of these options demand a higher premium than "normal" to account for the fact that the data isn't actually normally distributed.
- zeckalpha 11y agoSo... its time to raise interest rates?
- JonFish85 11y agoI'm quite curious to see whether that'll happen before the elections...
- uptown 11y agoNext month. Bet on it.
- epistasis 11y agoWhat are the best ways to bet on it, in terms of where to put money now?
- Gibbon1 11y agoMattress
- Tycho 11y agoI think the simplest thing would be sell Euros and buy Dollars.
- um_ya 11y agoNo, if there is another economic collapse, the fed will do more QE, which devalues the dollar. The best is to buy gold with your Euros.
- redtexture 11y agoBut the world at the same time would migrate to dollars with liquid funds, causing for the near-term a drop in prices of other currencies in relation to the dollar.
- mynameishere 11y agoEditor's note: This article has been updated to include another strange thing. Well, I laughed. That's the kind of thing "Cracked.com" won't inform you about on their "Seven strangest occurrences in the financial markets" list. Hats off to the Bloomberg Editors. But interest rates have been steadily coming down since the early Reagan years, and any reverse is going to be an epochal change. And that's where we are.
- semi-extrinsic 11y agoThere seems to have been a push recently, among the news sites who want to be seen as respectable, to be transparent about edits, updates and even retractions of articles. I, for one, welcome this change.
- kaa2102 11y agoPhysics has 3 laws that explain 97% of event while finance has 97 equations that explainless than 3% of events.
- username223 11y agoGod's a bit better than Mammon at system design ;-).
- PythonicAlpha 11y agoProblem only is, that many today only believe (and follow) in Mammon and not in God any more! You can believe in God or not, but what is better to believe in, when it comes to build and uphold communities?
- icebraining 11y agoNeither.
- et2o 11y agoHumanity has probably spent more man-hours on the last 3% than the first 97.
- TheOtherHobbes 11y agoIs that a bug or a feature?
- kaa2102 11y agoShorting long-term bonds with high modified duration would yield gains when interest rates rise and bond prices fall. Black swans and fractals: we can't predict the future but sometimes Blackswans flock together, e.g., autoregression, feedback patters, volatility of volatility, etc.
- verroq 11y agoCan somebody ELI5?
- mynegation 11y agoBasically a regime of very low interest rates alongside tighter regulatory requirements creates things that haven't been seen before. Negative swap spreads for example mean that investors consider credit risk of swaps lower than US treasuries, which are supposed to be the golden unattainable standard of safety. The reason for that is that swaps are collateralized, that is counterparties in a swap are obliged to give each other money they are owing pretty much each day so you are on the hook just for 1 day market movement. Not so with treasuries and faith in US treasury seem to down. Negative corporate bond inventories happened because new rules make it very burdensome for banks to hold corporate bonds because of reserve capital requirements. So bank sell their inventories and because there are many non-banking financial institutions that seem to have an appetite for corporate bonds, banks sell even more bonds than they have (being "short"). For the same reason synthetic credit is popular. Instead if holding an asset (corporate bond in this case) you recreate synthetic position with derivatives. For example, if you buy a right to buy a bond at a certain price and at the same time sell a right to sell a bond at the same price, it is essentially the same as if you bought a bond (bond forward strictly speaking, but we will omit the difference here).
- Animats 11y agoStrange things happen when interest rates are near zero. Things other than the cost of money start to have outsized effects. (One argument for a higher minimum wage is that it might cause some inflation, which would bring interest rates up a bit and get rid of some of these strange effects.)
- leaveyou 11y agoHigher minimum wage ??? So you want to punish the job creators for being successful ? Everyone knows that trickle down is the way to go. If it fails to trickle down you need to "inject" more money into the economy until it trickles down /s
- uptown 11y agoAnother strange one: https://pbs.twimg.com/media/CTqP8JhUcAA3Mwz.png:large https://pbs.twimg.com/media/CTqP8JhUcAA3Mwz.png:large
- zeckalpha 11y agoAny explanation for that?
- jzwinck 11y agoOf course not, that would be ridiculous. It's just a pretty picture made by cherry-picking years to superimpose and imply...something. Maybe there is some seasonality, but if you think the two graphs are impossibly correlated, it's just because you want to see that (and the author chose the data well).
- shlomo_goystein 11y agoSilly goy
- shostack 11y agoSo what should Joe Investor who is not a sophisticated investor, but likely has a ton tied up in say, an Index Fund, be doing right now?
- godzillabrennus 11y agoCash out. Wait for the bust. Buy back in.
- sxcurry 11y agoOne thing I've learned from HN over the years - be sure to ignore all financial and medical advice!
- shostack 11y agoAnd what about if the majority of that is in a 401k?
- hueving 11y agoSame applies. Change allocation to cash. Then change back after crash.
- WalterBright 11y agoThe trouble with switching to cash is then you've got to pay income tax on the capital gains. You'll be buying back in with less (proceeds - taxes).
- nextweek2 11y agoInvestment funds will offer a cash investment option. This invests in currencies. Along with government bonds it's considered low growth low risk investment. Nobody would advocate actually withdrawing from an investment account. Just move it to safer investment options.
- kmonad 11y agoThis all sounds important and exciting. But as an outsider, unlabelled graphs etc leave a lot of meaning to guesswork.
- kenesom1 11y agoGood introduction to the importance of fat tailed distributions in financial markets: http://aida.wss.yale.edu/~nordhaus/homepage/documents/statisticsoftailevents.pdf http://aida.wss.yale.edu/~nordhaus/homepage/documents/statis...
- kator 11y agoI wonder if the other factor besides interest rates is the prevalence of algorithmic trading. When I see these swings and I hear these "flash events" it reminds me of extremely fast decisions made by machines based on very small changes. I'm curious is there an index where we can see how much trading happens almost unattended on a daily basis via algorithmic systems? I wonder how that would map against the last decade of "systemic changes" in markets?
- theklub 11y agoThe entire thing has become a joke. It's all fake and manipulated and people are making tons of cash for nothing.
- cconcepts 11y agoI'm not very well informed on the markets, but is any of this related to the fact that gold is at a five year low and seems to keep going lower at I time that (I assume) people are looking for a hedge against uncertainty (what I thought gold was).
- X-Factor 11y agoPhysical gold is the only reliable asset if the markets collapse in case of a crisis similar to 2008. It's five years low and good time to buy!
- hliyan 11y agoNot every comment mentioning gold is automatically downvote-worthy. In case of market collapse, gold does tend to have more utility than other assets.
- um_ya 11y agoIf you're looking for a multiple on the gold trade, look into the gold mining sector. When gold moves a little, the gold miners move a lot. GDX and GDXJ are some good basket ETFs. GDXJ is the junior mining companies and has a higher multiple than GDX. It also works in the inverse too though, if gold goes down, these go down even more.
- jldugger 11y ago> It's five years low So the commodities market is collapsing?