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Musings On A Unified Risk Theory: Correlation, Vol, M3 And Pineapples
Chris Cole of Artemis Capital Management submits the following very interesting observations on a unified risk theory, which posits a unified connection between QE, cross-asset correlations, and the historically steep vol surface. As Chris suggests: "higher cross-asset correlations and vol curves are the unintended consequence of aggressive monetary expansion in developed economies. If this recovery was healthy correlations would be dropping and the volatility surface flattening, not the opposite!! Both are omens that profound systemic risk is building underneath the surface of this market." Must read material for our new "QE normal."
Unified Risk Theory - Correlation, Vol, M3 (pdf)
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The pineapples don't come until the afterlife, if we are so lucky as to have one.
http://www.youtube.com/watch?v=YssMT0qXYOw
JMO but if the fed announces QE (which is already in process) the market will sell.
no inflation but corn is up 27 just today
AND BEER PRICES ARE UP 25% THIS YEAR ALONE IN EUROPE!!!
i have noticed the prices creeping up @ local grocery store.
13% last week, and 27% today?! ---pheww, good thing there's no such thing as "price inflation!" Don't worry--this will NEVER translate to consumer prices!
That's what the Fed with its ridiculous food and fuel-free "inflation" numbers would have us believe, anyway.
Check this out, a commodity you've never heard of called samarium is up 152% since mid-July, along with all the other rare earth metals due to Chinese supply constrictions:
http://banksterreport.blogspot.com/2010/09/sell-gold-buy-samarium-chines...
And the commodities we all do know (silver, copper, corn, cotton, soy, cocao) are up as well.
So...Commodities up (a la summer '08), equities in a low volume "rally" (a la summer '08), everyone realizing that the banks' balance sheets are compromised by toxic housing-related "assets" (a la summer '08).... Phew!--Good thing summer '08 is past us!
Yes, we have no bananas.
Another Astute Observation
(Reuters) - Low interest rates can contribute to financial bubbles even if they are not a primary culprit, Janet Yellen said in her first speech as vice chair of the Federal Reserve.
Your central banker at work.
No way---that's impossible! Interest rates having nothing to do with bubbles--Alan Greenspan told me so!
If Bernanke had said that they can only buy star fruit (stocks), then corelations will not be balanced and if all the extra money went to star fruit (stocks), the good quality pineapples (gold) and the lesser quality of bananas (silver) will also rise as the people would realize that the bananas and pineapples are a better deal than the star fruit.
How about it?
Man, everyone is talking recession while we are seeing huge volume breakouts on consumer discretionary stocks like this:
Yep, my girlfriend still loves Pottery Barn, she continues to buy more crap at that store. No wonder WSM is skying.....
And no doubt, lots of guys with performance anxiety continue to pile into some junk plays. Yep, the absolute worst sectors like solar and newspapers.
Looks like your chance to load-up and make trillions on these stocks with great fundamentals and valuations...then maybe you can finally fulfill your lifelong dream of being interviewed on King World News.
The last chance to splurge before defaulting on all credit cards, can be very powerful and irrational.
yeah, right. i'm waiting for the government to do just that. been told "it could be another 1000 years."
My comment has to do with individuals spending to oblivion and then defaulting. Nothing to do with the government.
Tell her to save her money so she can buy the newest iGadget. Or just buy AAPL stock. Up, up and away. World's second largest company gains billions per day in market cap.
Tyler- Awesome! Thank you.
Chart: Dollar
Timmy!
http://99ercharts.blogspot.com/2010/10/dollar_6779.html
My take: It's almost hunting season, and I could go for a Bombay Sapphire and pineapple. Those two things very much correlate with happiness.
Mm, nice parabolic move downward by S&P there.
Chart: SPX
Ben!
http://99ercharts.blogspot.com/2010/10/spx_11.html
OH My! It's Laserium! A band called YES did a fine show this way a long time ago!
Have we discontinued the Bitchez comment-bys?
We almost did, but then you reminded everybody.
Yeah the Bitchez bullshit was getting old fast. I bet Tyler kicked the asses of all the bitchez comments. It seriously underminded this site and for the sack of this site, let's all say g'bye to positing "bitchez" and try to say something intelligent. Otherwise we come off as a bunch of conspiracy theory cum nut douchebags.
Meanwhile, smart money buys physical gold and silver. It's a trick I tell ya', a trick! A trick to keep people in the paper markets.
dedupe
Market so thin today, I could use it as a window!
All dips being bought.
Those 17-yr. old F12 punching monkeys being barked at by the FemBots are being instructed to "buy, buy, buy" until the market trend changes.
NO...DOWN...DAYS...EVER!!!!
I hope the machines keep me around for menial tasks. I could make a good servant for food and shelter.
there are losers in up markets, too. making a play for a President perhaps?
I swear, looks like a game of pong right now....
VIX fell thru the bollinger band today. Bullish sentiment is at an extreme......... ;)
Just a thought on gold and the creative currency chaos by the TPTB...
Countries and 420 banks are now calling for one world currency because of the chaos. Any chance there will be calls for everyone to exchange their currency and gold for an IMF currency, only to have gold revalued much higher right after it's in central banker hands, ala FDR part deaux?
Worked before.
"terrorification" of GLD causes irrational behavior among certain institutions and "chosen ones." How far the war being upon us then? I mean, honestly--ask yourself "what have i done to well do anything?" then ask yourself "what is the government about to do to keep you from happening."
These are exactly the questions I ask myself every morning.
Chart: ES and ZB
This Hanging Man is dedicated to Larry Summers. Thanks for fucking everything up, dude. Now go fuck Harvard...again.
http://99ercharts.blogspot.com/2010/10/es-zb_11.html
is it just me, or has high levels of correlation always implied higher vol? the fact that everything is moving is the same direction is paramount to the notion that one will experience higher levels of vol. due to the fact that there is nothing in the "mix" to offset each other...
in other words... the key is to assume that at times when things are highly correlated, things will be more vol. then, you can make adjustments on that notion as opposed to trying to guess the who, what, when, where, & why there is so much vol.
i do agree with the author that this implies something drastic in the long-run. as things revert to an equilibrium, they will have to overshoot as far in the opposite direction. we know these things cannot stay correlated forever, then again anything is possible these days
knowing that the "powers that be" need to be very precise... i'd say the chances of which are slim to none... the future does look to be becoming more and more interesting as the days go by
The markets are witnessing the resultant fallout and meltup from complex QE theft, i.e., Fed counterfeiting.
Nathan Martin of Nathan’s Economic Edge wrote this morning: “My take is that the much ballyhooed coming QE is going to be a major league sell the news event. The markets have risen wildly against terrible and worsening economic data. I’m certain that there’s concerted effort to keep things propped up until the elections, but adding trillions more against skyrocketing food and oil prices would be economic suicide. Thus don’t be surprised when all the hype turns out to be largely lip service.”
Regarding soft commodities, Nate says:
“The most significant move on the board is found in the soft commodities - FOOD. Friday saw several of the grains to lock-limit up, and this morning corn again went lock-limit up. That is not trivial; it is the worse possible move on the board. Of course it’s a tragedy for the human condition, but it’s also very dangerous for the investors in that space and will likely cause some margin calls to cover. The problem with these circuit breakers is that they don’t give market participants a good chance to escape as they go lock-limit into a freeze and when the market opens again it only takes ONE TRADE for it to go lock-limit into the next price level leaving no exit for those who are trapped. This is the fallacy of circuit breakers, they are very dangerous and most participants remain unaware of the dangers.
“In the past two days, corn has rocketed 17.6%, soybeans are up 11.8%, wheat has gained 10.6% and is up 70.5% since June, rice is up 13.7% in the past week, and oats are up 15.2% in the past two days and 102% since May, doubling in price just 5 months.
This is obviously a monetary phenomena, what you are witnessing is not a drought, it’s not that the government is going to turn corn into ethanol, it’s the debasement of your money plain and simple. This debasement is occurring when the “Fed” exchanges worthless debt for new digits to the banks who turn around and speculate in all the markets with their hot money. This is the exact opposite of helpful to the economy, it is an economic disaster.”
http://economicedge.blogspot.com/
Amazing, the $ was fairly strong today - but equities closed up.
Early in the aftermarket session, the $ is slightly up and the futures are... up.
We all here know what the meaningful correlation is anchored to.
High Frequency Trading creates enormous correlation. The algos buy the worst stocks to catch up to the average or better stocks. Algos do not fundamental research. Holly Hell when they all start to sell at the same time. They will sell everything all at once. We could see 25% to 50% losses in one day or week
This paper is very disquieting. I suppose all we can do is standby and kiss our asses good bye.
S&P500 Financials index has not been bullish for some time. This is a warning.
http://stockmarket618.wordpress.com/2010/09/27/mon-sept-27