• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Marco Lazzarino
 

Marco Lazzarino

on

  • 753 views

 

Statistics

Views

Total Views
753
Views on SlideShare
753
Embed Views
0

Actions

Likes
0
Downloads
0
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Marco Lazzarino Marco Lazzarino Presentation Transcript

    • Marco Lazzarino & Simone Zola See disclaimer at the end of the presentation Quant Strategies & Structuring: issues in high volatility markets
    • Contents
      • Overview
      • Quantitative Strategies
              • Algorithmic Trading
            • Multi-Factor Portfolio Construction
            • Bayesian Black-Litterman Models
            • Operational
      • Structuring
      • Funding
      • Equity
      • Final Considerations
      January 2009 MPS Asset Management Ireland LTD Quantitative Investment Department
    • MPS Asset Management Ireland - Quantitative Portfolio Management Quantitative Investment Department
    • MPS AM Ireland: Quantitative Portfolio Management MPS Asset Management Ireland LTD January 2009 Asset Under Management: 3 bln Euro 23 active sub-funds CASH 2 sub-funds active BOND 5 sub-funds active EQUITY 11 sub-funds active FLEXIBLE 3 subfunds active (IRISH SICAV) FX 1 sub-fund Formulaic 1 sub-fund Quantitative Investment Department
    • Discussion aims… The aim of our presentation is to point out some characteristics of the investment process typical of many quant companies showing how these features have proved being harmful in extreme market conditions and mainly in relation to volatility January 2009 MPS Asset Management Ireland LTD Quantitative Investment Department
    • Quantitative Strategies Quantitative Investment Department
    • MPS Asset Management Ireland LTD January 2009 Quantitative Strategies
      • We will focus on some of the most popular areas of quantitative portfolio management such as
          • Algorithmic Trading
              • Stop Loss
              • Noise Signals
          • Multi-Factor Portfolio Construction
          • Bayesian Black-Litterman Models: views
          • Operational: Hedging & Program Trades
      Quantitative Investment Department
    • MPS Asset Management Ireland LTD January 2009 Algorithmic Trading
      • Algorithmic Trading refers to automatic trading rules.
          • They range from Technical Analysis to complex Neural Network strategies.
          • Their investment horizon can be intraday (high frequency) or longer
          • Those techniques allow to identify signals according to which
          • Open a strategy
        • Close a strategy (Take Profit or Stop Loss)
      Quantitative Investment Department
    • MPS Asset Management Ireland LTD January 2009 Algorithmic Trading: Stop Loss A typical expression for a Stop Loss can be given by For a given l, the volatility gives the maximum affordable loss. In case of extreme levels of volatility, for a given l, the value at risk of the strategy can increase dramatically Enrica Cisana & Gavin Curran, Fixed Income Team * Currency Management: Overlay and Alpha Trading, ed. By J. James (2004) * Quantitative Investment Department
    • Algorithmic Trading: an example from FX MPS Asset Management Ireland LTD Recent high Vol affects SL levels Enrica Cisana - Fixed Income Team & Giulio Maggiori - FX Desk January 2009 Quantitative Investment Department
    • Algorithmic Trading: Noise Signals High volatility affects technical indicators that are purely trend following increasing the probability of noise signals January 2009 MPS Asset Management Ireland LTD Enrica Cisana & Gavin Curran, Fixed Income Team 10Y notes Future 7th January 2009 : LONG MACD/SO SIGNAL 10Y notes Future 8th January 2009 : SHORT MACD/SO SIGNAL Quantitative Investment Department
    • MPS Asset Management Ireland LTD January 2009 Multifactor Optimization Multi-factor models are worldwide used to monitor risk and for portfolio construction. According to them a generic security return can be expressed by Several versions have been studied and their level of sophistication can be significantly high They require identification of the Factors calibration of exposures Quantitative Investment Department
    • MPS Asset Management Ireland LTD January 2009 Multifactor Optimization Some of the most widely used software packages based on these models usually update risk exposures monthly. The updated risk exposures are usually available with a time lag… Portfolio managers tend to rebase their portfolios at the end of the month Lags between portfolio construction and exposures calibration were sources of inaccurate optimizations Quantitative Investment Department
    • MPS Asset Management Ireland LTD January 2009 Bayesian Black-Litterman Models: views Over several years, we have been collecting monthly views from most of the major brokerage firms in a unique database. Their goodness is assessed in several ways. Among them we use an Hit Ratio Views performance have been getting steadily worse Michael Harrington, Research Team Quantitative Investment Department
    • MPS Asset Management Ireland LTD January 2009 Quantitative Strategies - Operational Extreme volatility has affected executions of all types: program trades, time orders and hedging. Among the others, in FX for example, the all time high spread being charged in the actual market was not being reflected in the benchmark Neil Coughlan, Head of FX Desk Quantitative Investment Department
    • MPS Asset Management Ireland LTD January 2009 Quantitative Strategies – other… Difficult currency hedging for currency hedged products Volatile Program Trades executions Trading for counterparty risk exposure reduction Trading for volatility reduction in ALM products … Extreme volatility has affected executions of all types: program trades, time orders and hedging. Quantitative Investment Department
    • Structuring Quantitative Investment Department
    • Structured Products January 2009 MPS Asset Management Ireland LTD
      • Credit market (liquidity, haircuts…)
      • Interest rates
      • Risk models (OAS, CDS…)
      • Spot levels
      • Volatility (levels, patterns…)
      • Correlations (equity, interest rates…)
      • Interest rates
      Quantitative Investment Department
    • Structured Products
      • Funding:
        • Typical haircut on colla teral securities
        • Trends in corporate bonds
        • Volatility in corporate bonds
        • Opportunities from CDS market
      • Equity:
        • Volatility patterns
        • Volatility relative value
        • Correlations
        • Spot prices in equities and in options
        • Opportunities from exotic derivatives
      • Opportunities in structured products
      January 2009 MPS Asset Management Ireland LTD Bonds in a collateral portfolio FRN --- Portfolio Swap Equity Option Quantitative Investment Department
    • Funding: Typical Haircut January 2009 MPS Asset Management Ireland LTD Source: Global Financial Stability Report, IMF, Oct-08
      • Changes in the credit market:
      Quantitative Investment Department 50 - 60 3 - 5 ABS 10 – 20 2 - 4 Prime MBS 10 – 20 4 AAA CLO 100 50 Equity 95 10 - 20 BBB 95 8 - 15 A 95 4 - 7 AA 95 2 - 4 ABS CDOs: AAA 35 18 - 25 Mezzanine leveraged loans 15 – 20 10 - 12 Senior leveraged loans 5 1 Investment-grade corporate CDS 20 15 Equities 25 – 40 10 - 15 High-yield bonds 8 – 12 0 - 3 Investment-grade bonds 3 0.25 US Treasuries Agosto 2008 Aprile 2007
    • Funding: Trends in Corporate Bonds
      • Negative price returns
      • Increase in Asset Swap Spread
      January 2009 MPS Asset Management Ireland LTD Quantitative Investment Department
    • Funding: Volatility in the Bond Market
      • Radical increase in volatility level
      • Consequent increase in haircuts
      • Combined with fall in prices
      January 2009 MPS Asset Management Ireland LTD
      • Loss of value for collateral portfolios
      Quantitative Investment Department
    • Funding: Opportunities from CDS Market
      • Asset Swap Spread increased more than CDS
      • Negative basis wider on single name (as much as 800bps)
      January 2009 MPS Asset Management Ireland LTD Quantitative Investment Department
    • Equity: Index Level and Volatility
      • Spot levels have fallen a long way
      • Volatility has dramatically increased
      January 2009 MPS Asset Management Ireland LTD Quantitative Investment Department
    • Equity: an Uncharted Territory for Volatility
      • Spread between historical and implied volatilities inverted and widened
      • The skew steepened
      • The term structure reversed
      • Smirk in Equity Index (DJ EuroStoxx 50)
      January 2009 MPS Asset Management Ireland LTD Quantitative Investment Department
    • Equity: Consequences on Pricing Models
      • The Implied Tree of volatility forecasts the observed trends
      • But the scale is completely different
      • Difficulty in pricing out-of-the-money options with long maturities
      • Mispricing in the market:
        • Erratic behaviour of implied volatilities in quoted options
        • Anomalies in pricing of OTC derivatives:
          • The same product gets a participation of 60% from bank A and 35% from bank B
          • Exotic features results in completely different pricing
      January 2009 MPS Asset Management Ireland LTD Source: E. Derman 1999, Regimes of Volatility. Quantitative Investment Department
    • Equity: Opportunities
      • Short correlation:
        • Realized correlation has recently been very high if compared to the years of bull run
      • Short volatilty with minimum exposure to Vega:
        • Implied volatility is still very high and more bumps are being given to volatility since in strenuous times realized volatility is usually greater than implied volatility
      • Short skew:
        • Hard to hedge skew for underlyings that do not have a liquid option market
      • Cheap forward volatility:
        • Volatility term structure is inverted due to peaking short term volatilities
      • But all these structures are considered exotic: need of simplification to sell structured products in these days.
      January 2009 MPS Asset Management Ireland LTD Quantitative Investment Department
    • Final Considerations Quantitative Investment Department
    • Final Considerations MPS Asset Management Ireland LTD January 2009 Quantitative Investment Department
    • Disclaimer MPS Asset Management Ireland LTD January 2009 This material represents speaker’s personal opinions and not of MPS AM Ireland Indices mentioned throughout the document are property of respective owners Views expressed on single stocks or sector are theoretical examples and for presentation purposes only; they are not intended as solicitation to investment. Quantitative Investment Department