Correlation, Volatility and Returns
higher for longer
This week, we took a look at volatility and return distributions when pair-wise constituent correlations were high. Turns out, high correlation environments are congruent with high volatility and left-tailed return distributions.
You can read it here. Thoughts?
Markets this Week
The US Fed raised interest rates by 25bps…
… while the US economy continues to scream higher.
More here: country ETFs, fixed income, currencies and commodities.
Links
Research
If a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
Warren Buffett, 2007
Me, on pairs-trading, 2015
Pairs Trading Using Clustering and Deep Reinforcement Learning (SSRN)
The Volatility Smile Quantified, and Other Stories (SSRN)
Companies linked to social controversies experience an average drop in returns of more than 200 basis points in the days surrounding the outbreak of controversial news. To identify such social controversy events we build ControversyBERT, a large language model trained on a sample of 1 million news headlines to detect reports of controversial incidents in daily news feeds. Among the eight examined social dimensions, controversies surrounding violations of product safety standards, labour standards, as well as consumer data safety and data privacy breaches significantly affect firm returns. The corresponding stock price reaction is negative in all considered geographic regions and is largely driven by small to medium market capitalization companies for which information diffusion is slowest. Even though the build-up in controversy news sees most of the negative price reaction occurring before the event, our controversy indicator can help avoiding about 30% of the overall effect by the timely divesting holdings in the identified companies.
VIX-managed portfolios (SSRN)
Commodity ETF Arbitrage: Futures-backed versus Physical-backed ETFs (SSRN)
Nearly 60% of the stocks of U.S. public companies failed to earn returns in excess of Treasury bills and that only 2% created more than 90% of the aggregate wealth. So, investors can either seek broad diversification or build a portfolio that tries to avoid the wealth destroyers while owning the wealth creators.
The “Nudge” research was all bogus? (NPR)
How many clinical-trial studies in medical journals are fake or fatally flawed? (nature)
Investing
Buying stocks only for their dividend yield is idiotic. Here are VYM 0.00%↑ and SCHD 0.00%↑ - two of the most popular dividend ETFs:
SEBI seeks curbs to limit retail investors' derivatives risk… or something along those lines (reuters, reuters)
SEBI announces path-breaking move to T+1 settlement cycle (livemint)
Govt clears guarantee scheme for corporate debt (indianexpress, @menakadoshi)
India's Jio Financial Services, BlackRock to launch asset management venture (reuters)
What customers are really doing is paying for a certain number of use-years for the product, and it may be the case that the highest-quality version is, on that basis, also the cheapest. But proving that a product will be useful for a decade actually takes a decade, so if the market can get to saturation within the useful life of the first iteration of the product, sellers will not be able to price it at quite what it’s worth.
A great company isn't always a great investment:
Video games are using tricks from gambling to attract big spenders (theguardian)
Economy
To eat the seed corn: To eat the corn which should be saved for seed, so as to forestall starvation; - a desperate measure, since it only postpones disaster.
The Congress government cannot provide development this year, Karnataka Deputy Chief Minister DK Shivakumar said Wednesday in a candid remark aimed at making his party’s miffed lawmakers understand the financial constraints due to the five guarantees. (deccanherald)
Without investing in infrastructure, you are making sure that future generations are increasingly dependent on government handouts.
Powell: Fed Is No Longer Forecasting US Recession (ibtimes)
Britons turning into soap dodgers as cost of living soars (thetimes)
Warming Could Push the Atlantic Past a ‘Tipping Point’ This Century (nytimes)
Study finds climate change fingerprints on July heat waves in Europe, China and America (yahoo)
Odds & Ends
If artificial intelligence uses your work, it should pay you (washingtonpost)
You may have heard the term “Stockholm syndrome” before. It’s when an individual develops a positive connection with their captor or abuser. Did you know that there’s an opposite of Stockholm syndrome? It’s called Lima syndrome. In Lima syndrome, a captor or abuser forms a positive connection with their victim.
Meme of the week
