19 maja 2011

Raport - JPM - korelacje na rynkach finansowych

Ciekawe papiery od JPM na temat przyczyn i skutków rosnącej korelacji na światowych rynkach finansowych. Bardziej minimalistyczna forma z braku czasu bo zostawiam poniżej zajawki i wykresy po angielsku. Technika wskazania i podania wędki (taką preferuję), niż położenia ryby na talerz. Rise of Cross-Asset Correlations Asset Class Roadmap for Equity Investors Summary • Cross-Asset Correlations: Over the past ten years, cross-asset correlations roughly doubled. Globalization of capital markets, and new risk-management and alphaextraction techniques have driven the secular increase of cross-asset correlations. The recent cyclical increase is a result of elevated macro volatility. We believe that understanding the fundamentals and technicals of cross-asset correlation will be an increasingly important task for investors. • Currencies: The increasing share of EM equities, US and Japan debt, and the declining share of US equities in Global market capitalization is an important driver of correlation between currencies and equities. Risk-on/off trading, currency carry trades, and cross-asset arbitrage are further strengthening this correlation. • Interest Rates: Investors who decrease risk exposure usually sell equities to buy Treasury bonds. These risk flows cause a positive rate/equity correlation. Positive rate/equity correlation and a breakdown of the so-called “Fed Model” occurred in 1997 when three successive crises caused global de-risking and a flight to Treasuries. Risk of a correlation reversal is posed by severe stagflation or treasury/ equity contagion. • Commodities: Historically, diversification benefits resulted in significant investment interest for commodities. The traditionally negative correlation to equities reversed sharply in 2008, as a result of delevering and demand destruction. About 40% of current commodity/equity correlation is a spillover from FX/equity correlation. Despite diversification benefits, commodities are not immune to tail events such as the one recently exhibited by silver. • Credit: With current correlation of ~80%, credit, equities, and equity volatility are the most correlated assets. Correlation of credit and equities is logical as both are priced based on the value and volatility of company assets. In practice, correlation is driven by capital structure arbitrage and hedging of credit with equity instruments. • Equities: Due to the globalization of capital markets, cross-regional equity correlation rose steadily over the past 20 years. Recent high levels have diminished the benefits of cross-regional diversification. Macro volatility is a more significant driver of sector and stock correlation. Specific risk-management and alphaextraction trends impacting correlation were discussed in our report: “Why we have a correlation bubble.” • Alternative Assets: Low correlation between strategies and ability to generate alpha make hedge funds an attractive asset class. Over the past ten years, hedge fund assets increased notably relative to the size of global equity markets. Disciplined riskmanagement techniques and alpha extraction employed by hedge funds likely contributed to the secular increase of correlations. • Hybrid Derivative Trades: In this section we highlight several trade ideas that take advantage of current levels of cross-asset correlations. Equity hedges contingent on interest rates, currencies, or commodities can significantly reduce the cost of equity hedging and be tailored for specific scenarios such as US stagflation or a debt crisis. Kilka ciekawych wykresów: jpm_2011-05-16-Rise_of_Cross-Asset_Correlations Papier powiązany Why We Have a Correlation Bubble Global Derivatives Themes Summary • Correlations between stocks are currently at the highest level in recent history. This is a result of the macro-driven environment, record use of index derivatives such as futures and to a lesser extent ETFs, and high-frequency trading. The option-implied price of correlation is even higher – a result of an inadequate supply of index put options and oversupply of stock options via overwriting. We believe that correlation levels are in a bubble-like regime and are bound to decline. • Correlations impact fundamental investors and recommendations of equity research analysts. In two simple examples we show how correlation mutes long-short returns, and how it can distort the meaning of stock price targets and ratings. • Europe: Investors can monetize the high correlation levels by trading dispersion via volatility swaps or vanilla options. We look at Euro STOXX 50 enhanced dispersion baskets and describe a methodology to construct baskets of cheap single-stock volatility while controlling the tracking error. We also recommend selling Dec-11 correlation on the top 11 names of the SMI and on the top 17 names of the FTSE. • Asia-Pacific: While the absolute level of option-implied correlation in Asia has come off, investors can still capitalize on the cheap single-stock volatility and rich implied correlation by selectively entering into singlestock versus index spread trades. Alternatively, investors can consider packaged OTC products such as a call versus call dispersion as a means of going long the dispersion of stock returns for a sector or a customized basket. jpm_2010-10-05-Why_We_Have_a_Correlation_bubble

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