Our article on options gamma was extremely popular with readers, so we’ve asked its author, Thorsten Wegener, to return with another piece. This time he colorfully explains what implied volatility is in options markets.
For our two other Deep Dives, we take on two academic papers. One looks at using a growth measure to successfully trade currencies. The returns are impressive. The other introduces a new risk perceptions index extracted from US equity markets. It correlates well with other more well-known measures but appears to add something extra too. Both papers are stripped of jargon and only the most relevant bits for investors are kept in.
Finally, I’ll be speaking at the London School Of Economics (LSE) tomorrow on Dr Ashley Lenihan’s new book ‘Balancing Power Without Weapons’. Feel free to come along!
Enjoy
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(total reading time: 3 mins)
Our article on options gamma was extremely popular with readers, so we’ve asked its author, Thorsten Wegener, to return with another piece. This time he colorfully explains what implied volatility is in options markets.
For our two other Deep Dives, we take on two academic papers. One looks at using a growth measure to successfully trade currencies. The returns are impressive. The other introduces a new risk perceptions index extracted from US equity markets. It correlates well with other more well-known measures but appears to add something extra too. Both papers are stripped of jargon and only the most relevant bits for investors are kept in.
Finally, I’ll be speaking at the London School Of Economics (LSE) tomorrow on Dr Ashley Lenihan’s new book ‘Balancing Power Without Weapons’. Feel free to come along!
Enjoy
What’s In The Box? From Dead Cats To Implied Volatility (4 min read) The Eye of Horus was a symbol used to protect pharaoh in the afterlife and to ward off evil. Exchange ‘afterlife’ with ‘future’, and ‘evil’ with ‘losses’, and implied volatility becomes the trader’s very own Eye of Horus.
I usually start my lectures on volatility with a glance at historic volatility. For a good reason. By assessing historic data, we can see how a certain security behaved in the past and from its performance make informed assumptions about future behaviour.
If we’re well-versed in the dark arts of quantitative analysis, we also have the opportunity to calculate certain probabilities based on that past behaviour.
What I never mention to my students – but implicitly take for granted – is the understanding that there can, unlike in politics, only be one past. A certain security moved the way it did. There’s no questioning the how, only the why. It is also true that a certain security can only follow one path into the future.
(9th October, 2019 │Thorsten Wegener)
A Trading Model For Currencies Using Growth (4 min read) Currency markets often confound investors. Unlike equities or bonds, they are a long-short market, so if you buy one currency – say the dollar – you also sell another currency – perhaps the euro. This leads many to believe that there are no recurring sources of investment returns to be made from currencies. Yet specialists know better. Several strategies have proven to deliver returns, whether that is the currency carry trade (buying high interest rate currencies and selling low interest rate ones) or simply following the trend and buying the currency with the most momentum. But even with these strategies, many struggle to find useful links between economic indicators and currencies.
This paper, Business Cycles and Currency Returns, by academics Riccardo Colacito, Steven Riddiough, and Lucio Sarno, finds a compelling relationship between growth and currencies. Importantly, it is also one that can deliver positive investment returns.
(9th October, 2019 │Bilal Hafeez)
Introducing A New Risk Measure: The Price Of Volatile Stocks (PVS) (3 min read) Economists like Keynes, Minsky, and Kindleberger have highlighted the importance of shifting perceptions of risk in driving markets and the economy. When risk perceptions are low, risky markets tend to perform well. But when risk perceptions increase, safer assets come into demand. Over the years, numerous measures have been used to measure risk perceptions – one widely followed by investors is equity volatility or VIX. In this paper, Financial Market Risk Perceptions and the Macroeconomy, Carolin Pflueger, Emil Siriwardane, and Adi Sunderam introduce a new measure that they call ‘the price of volatile stocks’ or PVS. But does it work?
(9th October, 2019 │Bilal Hafeez)