George (Jojo) Wachsmann

Nice chart from Robin Brooks on flows into Brazilian financial markets. The market goes up when foreigners move in (though a distinction between foreign money and offshore Brazilian money is difficult to make). Brazilian residents are almost always taking money out, preferring U.S. stocks and Miami real estate.#emergingmarkets

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Most cited paper "Equity Portfolio Diversification" by William N. Goetzmann and Alok Kumar in Review of Finance, Volume 12, Issue 3, 2008, Pages 433–463, https://lnkd.in/dD64A-s Published: 28 March 2008 Abstract This study shows that U.S. individual investors hold under-diversified portfolios, where the level of under-diversification is greater among younger, low-income, less-educated, and less-sophisticated investors. The level of under-diversification is also correlated with investment choices that are consistent with over-confidence, trend-following behavior, and local bias. Furthermore, investors who over-weight stocks with higher volatility and higher skewness are less diversified. In contrast, there is little evidence that portfolio size or transaction costs constrains diversification. Under-diversification is costly to most investors, but a small subset of investors under-diversify because of superior information. JEL G11 - Portfolio Choice; Investment DecisionsG12 - Asset Pricing; Trading volume; Bond Interest Rates Oxford University Press OUP Academic Yale School of Management Texas McCombs School of Business European Finance Association

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Monitor: US BSL CLO New Issue Arb Trend Since 2017 The median arbitrage metric YTD at 195 bps is actually lower than in both 2022 and 2023, but this year’s new issue volume has already far exceeded the past two years’ volume on an annualized basis. Similarly, 2018-vintage deals had the lowest median arbitrage metric at 191 bps, but 2018 was a record-breaking year for new issue #CLO volume at the time. On the other hand, 2020-vintage deals had the best median arbitrage metric at 243 bps, but their new issue volume was the lowest. If you’re interested in learning more about the premium content or would like a walkthrough of the website via Zoom, please don’t hesitate to email me at info@clopremium.co.uk. https://lnkd.in/e6sUTfjw

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'Common risk factors in cross-sectional FX options returns' by Xuanchen Zhang, Raymond H Y So and Tarik Driouchi is now available in Review of Finance, Volume 28, Issue 3. Abstract: We identify a comprehensive list of thirty-eight characteristics for predicting cross-sectional FX options returns. We find that three factors—long-term straddle momentum, implied volatility, and illiquidity—can generate economically and statistically significant risk premia not explained by other return predictors. Meanwhile, the predictability of the other characteristics becomes insignificant after accounting for the FX option three-factor model. The significance of the three factors is confirmed through a series of robustness tests covering different data sources, alternative options strategies, diversification effects, bootstrapping, and omitting crisis years. Read the article: https://lnkd.in/ethzW-HF #reviewoffinance #finance

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Delta Hedging: The Feedback Effect Moving Markets in Illiquid Conditions Delta hedging involves: Maintaining a portfolio with an option and its underlying asset. Neutralizing the overall delta (change rate of option price w.r.t. underlying asset price). Purpose: Used by traders to hedge against price movement risks in the underlying asset. Impact in illiquid markets: Delta hedging can influence the underlying asset's price due to feedback effects. Traditional models: Black-Scholes assumes option replication does not affect the underlying asset’s price. Assumption holds in highly liquid markets but fails in illiquid markets where trading impacts prices significantly. 2. Delta Hedging Strategy The delta (Δ) of an option is defined as the partial derivative of the option's value (V) with respect to the underlying asset price (S): Δ=∂S/∂V​ For example, the delta of a European put option is: Δ=N(d1)−1 3. Market Impact of Delta Hedging Collective delta hedging by many traders can move the underlying asset's market price. Impact is more pronounced in illiquid markets where large trades cause significant price changes. Creates a feedback loop: Hedging activity influences the underlying asset price. Changes in asset price affect the option price. Leads to further hedging adjustments. 3.1. Feedback Loop Consider a trader holding a short position in a European put option. As the price of the underlying asset decreases, the delta of the put option increases (becomes more negative), requiring the trader to sell more of the underlying asset to maintain a delta-neutral position. This additional selling pressure can further depress the asset price, necessitating even more selling, and so on. This self-reinforcing cycle can lead to significant price movements in the underlying asset​ 3.2. Quantitative Analysis Let's denote: Δ(S,t) as the delta of the option, q(t) as the quantity of the underlying asset held for hedging, D(t) as the demand function induced by delta hedging. The demand function D(t) can be expressed as: D(t)=αΔ(S,t)D(t) where α represents the scale of trading. The change in the underlying asset price (ΔS) due to this demand can be modeled by: ΔS=λD(t) where λ is a parameter reflecting the market's liquidity (lower λ indicates lower liquidity). As traders adjust their positions, the new price S′S'S′ becomes: S′=S+λαΔ(S,t) This new price affects the option's delta, creating a feedback loop: Δ′=∂V(S′,t)​/∂S′ kickstart your Quant Interview Prep Check out Quant Insider Stack - https://lnkd.in/gcfdUEfg A Bundle of Interview Byte, Quantopia Library, and Quant Insider Project Handbook ‘Interview Byte’ contains 500+ Interview questions (https://lnkd.in/gkqcrrKf) Quant Insider Project Handbook has 10 HFT/hedge fund industry-oriented projects(https://lnkd.in/gWBEn78U) Checkout our course ML for Finance - Designed by Industry veterans, working at Wallstreet - https://lnkd.in/gtJDWcus

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In a world of high debt and rising interest rates, two EM countries -- Turkey and Mexico -- stand out as well positioned. Brazil, with its big fiscal deficits and high real rates, is in a mess. so is China, with huge debt and deflation.#emergingmarkets

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Chart of the day – Global Z-Score valuation implies a significant overvaluation of the global stock market My global Z-Score valuation indicator of the global stock market, based on the global equity index MSCI All Country World, is calculated as the average of the Z-Scores of four key valuation multiples: P/E, P/B, P/S and EV/EBITDA, based on the time-series since 1995. At the moment the valuation indicator value is +1.5 standard deviations. This means that the global stock market seems to be quite significantly overvalued. With that being said, +1.5 standard deviations also imply that if the global stock market valuations were to mean-revert in the upcoming period there would currently be approximately a 20% downside potential. However financial markets have also a strong historical tendency to overshoot and undershoot the historical average valuations which means that the downside potential could be even higher. Equities can for sure continue their rally into the second half of 2024. However, in my opinion, if this upward movement continues, the probability of a significant correction will be growing every other day, especially taking into account the fact that 1) the global economy growth momentum seems to be peaking right now based on global PMI indices and 2) the significant weakening of global economic data positive surprises based on the Citi Global Economic Surprise Index.

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Liquidity Ratios Original Content Creator: Nathan Liao, CMA (give him a follow) ---------------- 🚨10 Reasons Why Liquidity Analysis Matters And why they’re vital financial metrics 👇 Liquidity ratios show a company's ability To meet short-term obligations Here’s why this matters: 1. Credit Analysis: Banks and lenders use liquidity ratios to evaluate a company's creditworthiness. If the ratios suggest that a company might struggle to cover short-term liabilities, it could lead to a rejection of credit or higher interest rates. 2. Investment Decisions: Investors often use liquidity ratios to gauge the financial health of a potential investment. A company with high liquidity ratios may be seen as less risky. 3. Internal Financial Management: Management accountants use these ratios to understand cash flow patterns, manage working capital, and prepare for any financial bumps they might encounter. 4. Benchmarking and Performance Monitoring: Companies compare their liquidity ratios to industry averages or competitors to evaluate their performance. If a company's ratios are lower than industry standards, it might indicate a need for operational or financial adjustments. 5. Mergers and Acquisitions: In the due diligence phase of M&A, liquidity ratios play a key role in evaluating the target company's financial health. 6. Negotiating with Vendors: Companies with strong liquidity can often negotiate better terms with vendors, such as extended payment terms, because they're seen as more financially stable. 7. Financial Planning and Forecasting: Management accountants use historical liquidity ratios, combined with projected financials, to forecast a company's future liquidity position. This aids in strategic decision-making. 8. Crisis Management: In times of financial distress or during economic downturns, understanding a company's liquidity position is crucial. It can inform decisions about cost-cutting, restructuring, or seeking external financing. 9. Setting Internal Targets: Companies set internal benchmarks for liquidity ratios to ensure they always maintain a strong financial position. This can be especially important for businesses in volatile industries. 10. Stakeholder Communication: A company's liquidity position is often a topic of interest in shareholder meetings, creditor discussions, and even employee communications, especially in uncertain economic times. __________________ Original Content Creator: Nathan Liao, CMA (give him a follow)

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Microsoft (MSFT) is now the most valuable company in the world, with a market capitalization (MCap) of $3.1 trillion.   Obviously, such a robust company, with a virtual monopoly in key business segments, deserves a meaningful valuation premium.   However, as the following chart clearly shows, free cash flow (FCF) of the company has been more or less stagnant for the past two years. Therefore, I believe, the current P/E of 36x and P/FCF of 43x is absolutely not in line with the reality of corporate fundamentals as of 2024.   With that being said, the current lofty valuation premium prices in a steep exponential expected growth of corporate fundamentals – revenues, earnings and free cash flow – in the coming years which cannot definitely be taken for granted at the moment, despite all the AI hype nowadays. Hence, a normalization and mean-reversion of valuation multiples in the future could cause the share price to fall tremendously. Nevertheless, the precise timing of this happening is all but impossible of course.   Moreover, let's also not forget that the change in valuations is only one sub-component of the total stock return. The second key component is the dynamics of corporate fundamentals like earnings per share (EPS) or free cash flow. And those are also at all-time highs right now. So in the event of a (significant) decline in earnings and cash flow capacity, the share price would take a very strong hit from this direction as well.   While many investors would certainly argue from the expected AI-led business boost position at this point, I would like to remind that the stock market has a very strong historical tendency to price in overly optimistic and unlikely to materialize scenarios into stock valuations in the current time frame. And I believe this time is not different.   On top of that, I have crossed checked my subjective reasoning above with a reverse-engineered DCF model which has fully confirmed my analytical conclusions. All in all, it is extremely difficult to fundamentally expect another steep rise of the share price when both valuations and corporate fundamentals are at or close to all-time highs.

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Buy & Sell Signals How to Take Advantage of moves in (FEXD): Stock Traders Daily has produced this trading report using a proprietary method.  This methodology [...] Look at the Charts

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How Liquidity Impacts the Stock Market and Asset Markets Check the full interview at https://buff.ly/3xRCM8I

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The world’s #debt-driven growth model in one chart! As the primary source of growth (labor) evaporates, we need ever more debt to realize #GDPgrowth. You can see this everywhere and quickly think of what has to happen to keep this model afloat (low #yields, higher #inflation). Yet investors are very slow or unwilling to adjust their portfolios to deal with the massive elephant in the room.

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