"Not a time for statistics lovers" - Marc Chandler Brown Brothers
Periods of sentiment driven markets are the worst nightmares for a quantitative manager. When sentiment drives markets, the fundamentals will lose in the short-run. Volatility increases and correlations change. Assets which have value fall as much as those which do not.
In currency markets, there is a contagion surrounding the Greek problem. It has led to depreciation in most emerging markets. Safe assets with strong fiscal balance sheets have not been immune as risk aversion took over the markets. Moves to risk aversion make sense but they dominate other factors at this point.
Still, after an initial shock, there seems to be some order to the markets. Those countries with stronger reserves have fared better. A review of government plans has actually caused selling not because of irrationality but because there is a view that values have changed.
Even in time of sentiment driven markets, there is a reason to hold onto statistics. However, there are ways to protect from these regime changes in behavior. First, there is need for stop-losses. If the markets move against the statistics, take a time-out and wait for the time to past. Second , reduce leverage. There is less need for big bets. Third, include a trend component. In an uncertain time, following the herd makes sense at least at the extremes.
In currency markets, there is a contagion surrounding the Greek problem. It has led to depreciation in most emerging markets. Safe assets with strong fiscal balance sheets have not been immune as risk aversion took over the markets. Moves to risk aversion make sense but they dominate other factors at this point.
Still, after an initial shock, there seems to be some order to the markets. Those countries with stronger reserves have fared better. A review of government plans has actually caused selling not because of irrationality but because there is a view that values have changed.
Even in time of sentiment driven markets, there is a reason to hold onto statistics. However, there are ways to protect from these regime changes in behavior. First, there is need for stop-losses. If the markets move against the statistics, take a time-out and wait for the time to past. Second , reduce leverage. There is less need for big bets. Third, include a trend component. In an uncertain time, following the herd makes sense at least at the extremes.
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