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Darren 🥚🐣🕊️ Profile picture
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Sep 30 • 4 tweets • 4 min read
1/ Stock/Bond Correlation (AQR)

"For the past two decades the stock/bond correlation has been consistently negative, and investors have largely been able to rely on their bond investments for protection.

"But this hasn’t always been the case."

aqr.com/Insights/Resea…
2/ "Macroeconomic changes – such as higher inflation uncertainty – could lead to a reappearance of the positive stock/bond correlation of the ‘70s, ‘80s and ‘90s.

"This would either increase portfolio risk or force allocation changes likely to reduce expected returns."
3/ "We set out practical steps to prepare for such an outcome.

"Understand the drivers and implications of this ‘golden parameter’ before it loses its luster.

"Revisit alternatives, which could play a crucial investment role in a positive stock/bond correlation world."
4/ More reading:

Best Strategies for Inflationary Times


Investing Under Inflation Risk


Mapping Investable Return Sources to Macro Environments


When Stock-Bond Diversification Fails

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More from @ReformedTrader

Darren 🥚🐣🕊️ Profile picture
Oct 1
1/ Price Improvement and Payment for Order Flow: Evidence from A Randomized Controlled Trial (Levy)

"Robinhood (TDA) provide negligible (economically & statistically significant) price improvement compared with order execution via direct market access."

papers.ssrn.com/sol3/papers.cf… Image
2/ "NBBO does not accurately capture prevailing market conditions, as direct market orders receive price improvement.

"Studies which rely on the NBBO to measure price improvement are potentially overestimating the amount of price improvement that PFOF provides to retail orders." ImageImageImageImage
3/ "Consistent with randomization, across all firm characteristics and measures of market conditions,

"the differences between these two groups [the firms that *could* appear in the experiment and the ones that actually do appear) are not statistically significant." ImageImageImageImage
Read 13 tweets
Darren 🥚🐣🕊️ Profile picture
Oct 1
1/ When Stock-Bond Diversification Fails (Thapar, Maloney, Brixton)

"Traditional markets may underperform with rising or surprisingly high inflation.

"We assess asset classes often considered resilient to inflation: e.g., real estate, commodities, TIPS."
aqr.com/Insights/Resea…
2/ "Allocations to some (but not all) of these asset classes can provide valuable diversification in inflationary episodes.

"Two strategies offer potential outperformance during both upside and downside inflation surprises: price trend following and macro momentum."
3/ "Due to unprecedented monetary stimulus, coupled with extraordinary fiscal stimulus & supply chain disruptions stemming from the pandemic,

"Uncertainty around the future path of inflation should prompt investors to question how different outcomes can impact their portfolios."
Read 4 tweets
Darren 🥚🐣🕊️ Profile picture
Sep 30
1/ Global Style Portfolios Based on Country Indices (Angelidis, Tessaromatis)

"Factor portfolios created by dynamically weighting country indices generated significant global market-adjusted returns over the last 30 years."

risk.edhec.edu/sites/risk/fil…
2/ "The comparison between stock and country based factor portfolios suggests that country based value, size and momentum factor portfolios implemented through index futures or country ETFs capture a large part of the return of stock based factor strategies."
3/ "Given the complex issues and costs involved in implementing stock-based factor strategies in practice, country based factor strategies offer a viable alternative."
Read 6 tweets
Darren 🥚🐣🕊️ Profile picture
Sep 29
1/ Bond Variance Risk Premiums (Choi, Mueller, Vedolin)

"The term structure of implied variances is downward sloping across maturities and increases in tenors.

"Returns to shorting a Treasury variance swap are negative and economically large."

papers.ssrn.com/sol3/papers.cf…
2/ "Term structures are downward-sloping in the maturity dimension and upward-sloping along the tenor dimension.

"We call the difference between the (ex post) realized and the implied variance in the variance swap the (unconditional) variance risk premium."
3/ "The declining Sharpe ratios are consistent with findings of van Binsbergen and Koijen (2016), who document that Sharpe ratios in a range of markets (stocks, bonds, corporate bonds, index straddles, and housing) decline with maturity."
Read 12 tweets
Darren 🥚🐣🕊️ Profile picture
Sep 28
1/ The prime rate has moved from 3.25% to 6.25%.

The resulting drop in housing liquidity creates an opportunity.

I plan to purchase my next house with no loan and only 3% cash up front + maintenance costs.

This is an ITM call option priced at 1/3 of the Black-Scholes value.
2/ I am the most bearish fintwitter on housing, and it's not because I'm predicting a crash.

I think it's *possible* that prices will fall...


so we have to manage risk carefully. The more leverage, the bigger the risk of ruin.
3/ Refinancing last year at 2.75% would have been great timing, but it would also be a leveraged, illiquid long-house short-bond trade with a substantial risk of wipeout.

There are homeowners in this situation now who want to sell/move but don't want to lose that interest rate.
Read 17 tweets
Darren 🥚🐣🕊️ Profile picture
Sep 28
1/ Level and Persistence of Growth Rates (Chan, Karceski, Lakonishok)

"There is scant persistence in growth & limited ability to identify such firms. IBES forecasts are too optimistic. Valuations assuming persistently high growth have shaky foundations."

nber.org/papers/w8282
2/ "Security analysts are over-optimistic and do poorly in predicting realized growth over longer horizons.

"Very few firms are able to live up to the high hopes for consistent growth that are built into high valuation multiples."

More on analysts:

.
3/ "Table 1 provides a reality check for analysts & investors who flock to stocks with rich P/E multiples.

"Our growth rates are based on firms that survive for the following one, five or ten years. Survivorship bias probably induces an upward bias in our reported growth rates."
Read 20 tweets

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