En este episodio, Gaston empieza a trabajar con opciones y Leo le da una mano explicándole -de forma introductoria- de que tratan. Y para el final, le cuenta de una estrategia utilizada mucho en Argentina.
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Posts Tagged ‘leverage
09
Jun
11
Paper: No aprendes más
THIS TIME IS THE SAME: USING BANK PERFORMANCE IN 1998 TO EXPLAIN BANK PERFORMANCE DURING THE RECENT FINANCIAL CRISIS
We investigate whether a bank’s performance during the 1998 crisis, which was viewed at the time as the most dramatic crisis since the Great Depression, predicts its performance during the recent financial crisis. One hypothesis is that a bank that has an especially poor experience in a crisis learns and adapts, so that it performs better in the next crisis. Another hypothesis is that a bank’s poor experience in a crisis is tied to aspects of its business model that are persistent, so that its past performance during one crisis forecasts poor performance during another crisis. We show that banks that performed worse during the 1998 crisis did so as well during the recent financial crisis. This effect is economically important. In particular, it is economically as important as the leverage of banks before the start of the crisis. The result cannot be attributed to banks having the same chief executive in both crises. Banks that relied more on short-term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.
Link al Paper
11
May
11
Fun & Finance: capítulo 8, ETFs
(Fuente: International Securities Lending Association, via FT Alphaville)
15
Aug
10
Paper: Hedge Fund Leverage
Hedge Fund Leverage
Abstract:
We investigate the leverage of hedge funds using both time-series and cross-sectional analysis. Hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the leverage of investment banks is highest. Changes in hedge fund leverage tend to be more predictable by economy-wide factors than by fund-specific characteristics. In particular, decreases in funding costs and increases in market values forecast increases in hedge fund leverage. Decreases in fund return volatilities also increase leverage.
Link al Paper
23
Jun
10
un poquito de leverage…
CSS Analytics tiene un post donde muestra la relación entre fundamentals y análisis técnico vía el Efecto Apalancamiento.
The “leverage effect” and subsequent theory originated from early studies done by Fisher Black (of Black-Scholes fame). Black found that stock volatility tended to rise when stock prices went down and that volatility fell when prices went up. The economic rationale behind this effect is rooted in the firm’s capital structure. As a stock rises, the percentage of equity to debt rises, and the firm becomes less risky since the debt holders claims to the company value are more limited. Conversely, as the stock falls, the percentage of equity to debt falls, and the increased share of debt holder claims make the firm’s equity more risky. Thus a falling stock price should lead to an increase in future volatility.
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Well most educated finance students understand first of all the principle of balance sheet leverage: when you add debt to the balance sheet, a given % increase in sales has a disproportionately larger increase in the % increase in earnings because you are netting out a fixed interest cost. If we all agree that 1) the market tends to discount future GDP and hence revenues, and 2) that firm value is also a function of earnings growth and total earnings, then the firms that will experience the greatest percentage change in firm value when the market forecasts a recovery should mathematically be the most leveraged firms.
This affects the technical trader in many ways whether you trade short-term or not. It means that the biggest winning stocks will have strong velocity relative to volatility (think sharpe ratio) only while the market is rising. When the market peaks, in fact, their velocity relative to volatility will have peaked at extraordinary levels. At this point the firm’s debt to equity is often at unsustainable levels–leaving it vulnerable to the largest proportionate changes in firm leverage–and hence future volatility/downside risk.
Is There a Distress Risk Anomaly? Corporate Bond Spread as a Proxy for Default Risk
Abstract:
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
28
May
10
Paper: Alpha y volatilidad
Alpha Generation and Risk Smoothing using Volatility of Volatility
Abstract
Volatility of returns has been studied extensively in the literature but volatility of volatility (vovo for short) has been given very little consideration. This paper takes an expository look at vovo and discovers some remarkable results and concepts. These include alpha generation and risk smoothing strategies along with tactical asset allocation insights. Most of these results are quite novel due to the lack of current research on vovo.
The paper starts with a discussion of the mathematics of leverage. It produces a formula for the optimal leverage of an investment for a given market environment. It may come as a surprise to some that there is an optimal leverage since it may seem that if the return from an investment is greater than the cost of borrowing then the more leverage, the better the return. However, it is shown that volatility exerts a drag on the return of leveraged investments and the drag, being a squared function of return, eventually overwhelms any extra return that comes from using leverage.
Leveraged Exchange Traded Funds (ETFs) are used to illustrate the principles. We show how ETFs can be used to implement continuously dynamic leverage. We also clear up a myth about long term holding of leveraged ETFs. Sample data id shown from a number of stock markets including data from as far back as 1885.
Link al Paper
08
Apr
10
Paper: apalancamiento y Burbujas
Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?
Abstract
An iconic model with high leverage and overvalued collateral assets is used to illustrate the amplification mechanism driving asset prices to ‘overshoot’ equilibrium when an asset bubble bursts—threatening widespread insolvency and what Richard Koo calls a ‘balance sheet recession’. Besides interest rates cuts, asset purchases and capital restructuring are key to crisis resolution. The usual bankruptcy procedures for doing this fail to internalise the price effects of asset ‘fire-sales’ to pay down debts, however. We discuss how official intervention in the form of ‘super’ Chapter 11 actions can help prevent asset price correction causing widespread economic disruption.
Linal Paper
08
Mar
10
CDS, pros & cons
Rajiv Sethi tiene un interesante post sobre CDS; el mismo cumple el rol de resumir la postura de varios bloggers al respecto.
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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.
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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.
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El autor de este post cita el siguiente paper: The Leverage Cycle.
Quantitative Finance Club 