Barclays Quant Strategy: "Mispricings In The Market May Be Beginning To Take Root"

Barclays' head of quantitative strategy Matt Rothman provides some additional information on one of the most notable facets of the current market regime, namely the record implied correlation and thus, near record low stock dispersion, in other words, the phenomenon that all stocks trade as one, regardless of fundamental differences across different publicly traded companies. While nothing a slight dip in 1 month implied correlation from all time records near 70% hit in the past month, Rothman observes that "low levels of stock dispersion generally correspond with difficulty in picking individual stocks...This high level of cross-sectional correlation also has implications for how certain characteristics are being priced. For if stock return dispersion is low but underlying fundamental (economic) performance of factors remains relatively constant then it would appear that mispricings in the market may be beginning to take root." In other words, as we noted last time we observed the record low stock dispersion a month earlier, alpha (continues to be) dead. Yet for those who are eagerly anticipating the dispersion to finally rise, Rothman says that the market is basically back to mid-2009, when high quality stocks were largely undervalued compared to low quality: "High Quality companies are cheap right now relative to low Quality companies. We believe this is due both to a compression of returns in the market and because of the current macro-economic environment that has favored lower Quality stocks." Of course, shorting high beta names in a Fed-mediated market, has led to nothing but implosion.

Comments

[Manipulism]

Wow, no idiotic "bitchezzz" comment so far.

Whats wrong.

Go ahead, make this blog better.

[ZeroPower]

Id say yours is the first.

[King_of_simpletons]

Define 'high quality company'

Define 'low quality company'

[Gimp]

Another sales pitch. Let's all run out and buy, buy, buy.

[DrDre]

So much for 'quant' strategies ...

http://ftalphaville.ft.com/blog/2010/04/07/197401/a-quant-mea-culpa/

[gringo28]

just buy cash generating monsters, who operate in growth economies/segments.

[I am more equal...]

With the suspension of mark to market hasnt this stuff been mispriced for some time and we're all living on Fantansy Island.  Da plane da plane Robert Reich screams....

[Bankster T Cubed]

a currency-linked program controlls all prices

nothing else matters

insiders make zillions, everyone else says wtf

[nevadan]

"...higher Quality companies appear to be attractively valued on a relative basis"

Or, put another way, lower quality companies are simply overpriced.

[Bartanist]

Doesn't game theory indicate that the computer models will gravitate to one and squeeze all of the alpha out of the quant trade?

What we really need is two separate markets; one independently computer bid ask matched free market for private investors only (not guaranteeing any level of liquidity) and a completely different market run by the Investment banks for their casino gambling games and guaranteeing instant liquidity.

 Investment banks would be prohibited from participating in the free market, no leverage and no shorting of any kind would be allowed. It would be solely for companies to raise capital and to allow private investors to participate in the future of the companies that need capital.

[mudduck]

After reading this I realize, I shoulda stayed in school, I could've been a plumber.

[susiesss]

HI?would you please send me the original report?

[susiesss]

my email is [e-mail]