Skip to main content


Showing posts from August, 2020

Why safe assets, such as gold and treasury bond cannot hedge market risk?

 In early 2020, SPY (SPDR S&P500 ETF Trust), GLD (SPDR Gold Trust), and IEF (iShares 7-10 Year Treasury Bond ETF) fell simultaneously. Most people think that Gold and US treasury bond should rise while the stock market falls as they are the safe assets. Here are some reasons to explain why they cannot hedge market risk. Most hedge funds have a hedged portfolio. Their portfolios appear to have gone through a significant amount of deleveraging in March of 2020. Multi-strategy funds suffered losses so that they needed to rebalance the portfolio by unwinding their equity market neutral books. Most hedge funds use leverage to increase profit. In normal conditions, leverage allows portfolios to be more flexible and less constrained. Leverage gives long/short equity managers the flexibility to tune their books to the desired size, and add securities without resorting to exiting positions in other parts of the book to fund those purchases. The entire concept of risk parity relies on using

Why we focus on index ETF?

  Why we focus on index ETF? 1. Inflation We believe that world economic growth is unstoppable. 20 years later, the price of Coca-Cola will be higher than the present. Deflation is harmful, but a suitable inflation rate can stimulate the economy. Central banks will remain inflation rate% positive when deflation is likely to happen (economic recession). 2. Diversification A good portfolio construction can reduce overfitting and portfolio volatility so that the Sharpe ratio can be increased. 3. Higher market liquidity Higher liquidity means lower volatility. It helps us to execute a better price.

Deflated Sharpe Ratio can reduce false discovery

  Introduction With the recent advent of large financial datasets, machine learning, and high-performance computing, analysts can backtest millions of alternative investment strategies. Backtest optimizers search for combinations of parameters to maximize a strategy's simulated historical performance, leading to backtest overfitting. The performance inflation problem goes beyond backtesting. More generally, researchers and investment managers tend to report only positive results, a phenomenon is known as selection bias. Failure to control the number of tests involved in a given finding can lead to overly optimistic performance expectations. The Deflated Sharpe Ratio (DSR) corrects for two major sources of performance inflation: selection bias under multiple tests and non-normally distributed returns . By doing so, DSR helps separate legitimate empirical results from statistical deception. Backtesting is a good example. Backtesting is a historical simulation of how a particular inv

US equity market will not be affected by any foreign market crises

We study financial market contagion by applying the volatility index and the correlation between global markets. The first discovery is that it is difficult for any foreign economic crisis to spread to the US equity market. US market may be slightly affected and drops 1%-5%. However, when this event happens, it is usually a good buyback opportunity. Another discovery is that when there is an economic crisis in the US, the fear must spread to all global markets. In US financial crises, it often said, “all correlations go to 1.” Francois Longin and Bruno Solnik (2001) used “extreme value theory” to derive the distribution of extreme correlation between US, European, and Asian stock markets. They found that the S&P 500 seemed to lead the other two markets in terms of extreme positive or negative returns. Therefore, investing in other equity markets during the US financial crisis doesn’t reduce losses. Data: 1997 Asian financial crisis 1998 Russian financial crisis 1999 Argentina econo

Chicago Fed National Activity Index (CFNAI) can predict US economic uncertainty

What is the Chicago Fed National Activity Index (CFNAI)? Many people use unemployment rate% to measure the US economy. The correlation between unemployment rate% and GDP growth is always negative. However, many people now realize that it is wrong. Unemployment rate% has not been a good predictor since 2008. There was a precaution telling you that the unemployment rate% cannot accurately measure the economy in the past. Using CFNAI to measure the economy is better than using the unemployment rate%. The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend. The 85 economic indicators that are included in the CFNAI are drawn from four broad categories of data: production and income;

1929 Market Crash Cause

Many people believe in the reason why the market value of all share listed in NYSE fell by 30% is that there was an economic bubble and the stock market is irrational. However, is that the truth? We are going to show you three different approaches to the 1929 market crash. Remember that correlation is not causation. These are just references. Approaches: 1. There was no economic bubble before the 1929 market crash. Irving Fisher, a famous US economist said: “prices of stocks are low.” Fisher based his projection on strong earnings reports, fewer industrial disputes, and evidence of high investment in R&D and other intangible capital. 2. There was insider trading. In the months prior to the stock market crash of 1929, the price of a seat on the NYSE was abnormally low. Rising stock prices and volume should have driven up seat prices during the boom of 1929; instead, there were negative cumulative abnormal returns to seats of approximately 20% in the months before the market crash. A

Donation to Human Rights Foundation ( and Stop Human Right Violation Since the Hong Kong protest began, Hong Kong has suffered a human rights issue. Some Hong Kongers were killed, a female teenager claimed that she was raped, numerous protestors were unfairly treated after they were caught, but none of the police officers have been punished so far. Since I was born, I knew there was a human rights issue in this world, but I didn't realize that was a serious problem and how horrible it was until I  witnessed this issue happening in Hong Kong. When I was 16, I was deeply immersed in financial trading. I was focusing on finding patterns, learning how to make money through trading, and seldom caring for other people. Some readers who are now reading this article may be similar to me. Probably, you want to change your destiny by making more money. I don't think it is wrong because I do it too. However, apart from making money, I think