En esta ocasión, German le ofrece a Gaston un pantallazo como mirar las conexiones dentro del mercado financiero.
No se olviden de LIKE THIS !!
FT Alphaville tiene un buen post sobre la actualidad del mercado de CDS (soberanos). Ofrece gráficos interesantes y una respuesta a la pregunta: ¿Que es el Quanto Spread y por qué existe?
The difference between the USD CDS spread and EUR CDS spread is referred to as the Quanto spread.
Can Firms Now Act as Their Own Information Intermediaries? The Role of Direct-Access Information Technology in Disseminating Firm News
Recent research indicates that press-based dissemination of firm-initiated information plays a critical role in the effectiveness of the disclosure (Bushee et al., 2010; Soltes, 2010). However, traditional information intermediaries, such as the press, face constraints on the amount of news they can disseminate to investors. This paper examines whether firms can complement traditional dissemination channels by using new information technology that provides firms direct access to a broad set of investors on a real-time basis. Using a sample of technology firms with active Twitter accounts, we find that postings (tweets) increase around firm-initiated news events. This increase is primarily driven by tweets containing hyperlinks, which is consistent with firms using this innovative technology to disseminate firm news. We also find that greater tweeting during news event windows is associated with lower bid-ask spreads and greater depths. These relations are stronger for tweets with hyperlinks. We also find our results are more pronounced for firms with lower visibility—that is, firms that are smaller, have lower analyst coverage and have fewer shareholders. These findings suggest that managers use this new direct-access information technology to reduce information asymmetry, particularly for those firms that are arguably most in need.
Link al Paper
Asi se llama un reciente post del blog de Kamakura Corp. De forma inteligente parte de una noticia sobre BP, para elegantemente criticar -y hacer un poco de PR de su método alternativo- el conversor de CDS de ISDA de spread basis a upfront basis.
As Prof. Jarrow describes it, there are two ways to understand the linkages between CDS spreads and default probabilities:
Bottoms up approach: Build a model, assume it’s true, and solve for continuous default probability (“risk neutral”) that matches observable pricing
Top down approach: Determine the factors driving the intersection of supply and demand and use an econometric approach to derive (empirical) default probabilities
The ISDA Standard CDS Converter is a “bottoms up” approach that makes a number of simplifying assumptions, something very much in keeping with the “yield to maturity” analogy:
- Forward interest rates are step-wise constant, not a smooth continuous curve such as those we have discussed in our many blogs on yield curve smoothing
- Default intensity, the continuous time probability of default, is constant over the life of the credit default swap contract. Similarly, the yield to maturity formula assumes that interest rates are constant over the life of the bond in question.
- The only relevant factors to consider are the instantaneous probability of default, the recovery rate, and interest rate levels
- The counterparty on the CDS contract will not default
There is nothing wrong with this approach–as long as one is aware of its limitations. The yield to maturity formula, for example, is deeply embedded in bond markets but it is well known that it is not best practice for valuation or risk management. In the same way, the ISDA Standard CDS Converter is embedded in the mechanics of settlement but it is too simple for accurate valuation and risk management.
The reason the ISDA Standard CDS Converter is too simple is that it assumes only three factors affect the link between CDS spreads and default probabilities:
- Interest rates
- Recovery rates
- The constant continuous time default intensity
We now turn to the “top down” approach to show why the ISDA Standard CDS Converter is too simple for accurately describing the links between spreads and default probabilities. Instead of assuming the (ISDA) theory is true, we assume the market data is true and derive insights from it. In this section, we summarize our findings in the RISK 2007 publication and companion blog entry listed above. For data on default probabilities, we used the then-current reduced form or “Jarrow-Chava” default probabilities from Kamakura Risk Information Services.
Is There a Distress Risk Anomaly? Corporate Bond Spread as a Proxy for Default Risk
Although financial theory suggests a positive relationship between default risk and equity returns, recent empirical papers find anomalously low returns for stocks with high probabilities of default. The authors show that returns to distressed stocks previously documented are really an amalgamation of anomalies associated with three stock characteristics — leverage, volatility and profitability. In this paper they use a market based measure — corporate credit spreads — to proxy for default risk. Unlike previously used measures that proxy for a firm’s real-world probability of default, credit spreads proxy for a risk-adjusted (or a risk-neutral) probability of default and thereby explicitly account for the systematic component of distress risk. The authors show that credit spreads predict corporate defaults better than previously used measures, such as, bond ratings, accounting variables and structural model parameters. They do not find default risk to be significantly priced in the cross-section of equity returns. There is also no evidence of firms with high default risk delivering anomalously low returns.
Link al Paper
Baseline tiene un interesante post que agrupa la problemática europea: deuda, deficits, riesgo moral, corrupción, rescate.
The eurozone self-rescue plan announced last night has three main elements:
- 750bn euros in a fiscal support program, with 1/3 coming from the IMF (although this was apparently news to the IMF).
- The European Central Bank promises to buy bonds in dysfunctional markets.
- Swap lines with the Federal Reserve, to provide dollars
The underlying problem in the euro zone is that Portugal, Ireland, Italy, Greece, and Spain are locked into a currency which means they are uncompetitive in trade terms while they are also running large budget deficits. To get out of this they need large wage and price cuts to restore competitiveness, and they need to make fiscal cuts to get budget balances back at sustainable levels.
Markets decided these adjustments were going to be difficult, so spreads on those countries’ debts widened (i.e., interest rates relative to German government bonds). As the rates go up, this causes local asset prices to fall, concerns over bank balance sheets increase, etc. This combination was causing an incipient run on banks. Any country with its own currency could reasonably devalue in such a situation, but this is not an option within the euro bloc.
To ultimately get out of this mess, the euro zone needs to grow fast enough to allow nations to grow out of debt. The global backdrop here is very positive in the short term. The jobs numbers in the US last week and strong numbers out of core northern Europe suggest the world can grow. No doubt the ECB and the Fed will use the eurozone scare to justify longer loose policies.
It could be that in two years time Europe’s deficits are much lower, the ECB has hardly bought any bonds, and they have successfully managed a Greek debt restructuring while Spain is out of trouble, and Portugal and Ireland are scraping by in limbo but now isolated problems. With the US likely to still be running near 10% GDP budget deficits – who will seem more risky then? This immediate confidence in the US dollar that has come out of this European crisis could very quickly evaporate.
Alternatively, the underlying fiscal problems in Europe could fester – and the “rules” designed to limit moral hazard may turn out to be a complete paper tiger. In that case, the Europeans again have to make a fateful decision: Do they try to inflate out of the debt burdens of their weakest member countries; or do they instead try to manage selective default, keeping in mind that most Greek debt at that stage will be held by other eurozone governments.
FT Alphaville tiene un post dedicado a los modelos quants (pair trading aplicado al tipo de cambio euro/dolar) y a su impacto -via trading- en la zona euro.
(…) Funds trading the Euro-US dollar (EURUSD) typically use a pair trading technique pinched from equities trading models. The currencies model buys EURUSD on a statistical dip below the level of EURUSD implied by the 2-year swap spread. In other words, it assumes a mean reversion between the swap spread and the currency pair. (…) a start it’s been forcing the EURUSD to trade within a very specific range (…) Plus, the swap spread hasn’t decreased by very much since Germany continues to do reasonably well — or at least better than Greece and its porcine brethren.
El articulo cita palabras team de monedas del BNP Paribas, con respecto a este tema
EURUSD is currently traded by four main classes of investors:1. Importers/exporters who have had a non-negligible impact in keeping EURUSD from moving lower 2. Macro hedge funds which had expressed their bearish credit view on EMU via EURUSD bearish positions 3. Systematic funds who trade EURUSD in deviation to the 2 year EURUSD swap spread 4. Central Bank and Sovereign Wealth Funds which have generally under-invested in EUR and likely USD and behave as a mix of macro and systematic funds. The net impact of this activity has been to temporarily block the downward path of EURUSD, a tragedy for EMU as it has accelerated the next wave of the sovereign crisis and triggered the Greece rescue package.
Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2010 Edition
Equity risk premiums are a central component of every risk and return model in finance and are a key input into estimating costs of equity and capital in both corporate finance and valuation. Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. We begin this paper by looking at the economic determinants of equity risk premiums, including investor risk aversion, information uncertainty and perceptions of macroeconomic risk. In the standard approach to estimating equity risk premiums, historical returns are used, with the difference in annual returns on stocks versus bonds over a long time period comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets, where the historical data tends to be limited and volatile. We look at two other approaches to estimating equity risk premiums – the survey approach, where investors and managers are asked to assess the risk premium and the implied approach, where a forward-looking estimate of the premium is estimated using either current equity prices or risk premiums in non-equity markets. We also look at the relationship between the equity risk premium and risk premiums in the bond market (default spreads) and in real estate (cap rates) and how that relationship can be mined to generated expected equity risk premiums. We close the paper by examining why different approaches yield different values for the equity risk premium, and how to choose the “right” number to use in analysis.
Link al Paper
Nota: en Noviembre posteamos un link a un paper del mismo autor, sobre el mismo tema.
Rajiv Sethi tiene un interesante post sobre CDS; el mismo cumple el rol de resumir la postura de varios bloggers al respecto.
Leaving aside the question of whether naked CDS trading has been good or bad for Greece, it is worth asking whether there exist mechanisms through which such contracts can ever have destabilizing effects. I believe that they can, for reasons that Salmon and Jones would do well to consider.
Any entity (private or public) that faces a maturity mismatch between its expected revenues and debt obligations anticipates having to to roll over its debt periodically. Such an entity could be solvent (in the sense that the present value of its revenue stream exceeds that of its liabilities) and yet face a run on its liquid assets if investors are sufficiently pessimistic about its ability to refinance its debt. More importantly, it may face a present value reversal if the rate of interest that it must pay to borrow rises too much. In this case expectations of default can become self-fulfilling.
Dudley is speaking here of financial firms, but his arguments hold also for governments that do not have the capacity to issue fiat money. This is the case for state and local governments in the US, as well as individual countries in the eurozone. The main “assets” held by such entities are claims on future tax revenues, which are obviously not marketable. In this case, expectations of default can become self-fulfilling even when solvency would not be a concern if expectations were less pessimistic.
El autor de este post cita el siguiente paper: The Leverage Cycle.
Yield Curve Predictors of Foreign Exchange Returns
In a no-arbitrage framework, any variable that affects the pricing of the domestic yield curve has the potential to predict foreign exchange risk premiums. The most widely used interest rate predictor is the difference in short rates across countries, known as carry, but the short rate is only one of many factors affecting domestic yield curves. We ﬁnd that in addition to interest rate levels other yield curve predictors have signiﬁcant ability to forecast the cross section of currency returns. In particular, changes of interest rates and term spreads signiﬁcantly predict excess foreign exchange returns, exhibit low skewness risk, and are lowly correlated with carry returns. Predictability from these yield curve variables persists up to 12 months and is robust to controlling for other predictors of currency returns.
Link al Paper