6 ms·
> The number of assets registering large moves—four or more standard deviations away from their normal trading range—has been increasing. Such moves would norma
by 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.