13 May 2015
How much fear is priced in to your trades? - SG
FXStreet (Guatemala) - Some thoughts around fear in respect of trading from Sebastien Galy, analyst at Scotiete Generale.
Key Quotes:
"From Paul's test of pain to prove his humanity to a witch or his litany 'I must not fear, fear is the mind killer' self-confidence plays a secondary role to the inhibited truth that much is out of our control."
"Fear is both:
1. instantaneous (local implied risk aversion via pratt theorem)
2. a temporal resolution, when the utility is non time separable
3. a ghastly habit of leading to poor decision making as the time horizon narrows boosted by adrenaline. For the quantsy version it would be a high intensity or activity in the time clock used for example in combination with Levy processes
4. leads to break down in cooperative games (e.g. dictatorships, 'collaboration')."
"Fear is the mind bender if you are overly long usd as risk mgt which had hammered bonds does another trip through fx for a day or so (point 1).
The slowdown in the US is a short cycle in what is widely presumed a long term subdued growth potential suggesting we have learned little today we didn't know (point 2, resolution of risk is rapid).
"Poor decision making is what methodology, experience, paper and systematic trading try to stem. By valuation standards we are a tad above short term fair value in eurusd quite below cyclical models that are still heading lower following spot after a structural ECB shock to the original equilibrium. Demand to buy eurusd on dips is likely now rising at levels above parity for long term investors but they will be wary of underestimating an overplay in bearish us sentiment."
"Has the cooperative equilibrium been shaken? Is the usd story dead? Have a sip of coffee and wait to buy USD at higher levels vs EUR. Under-estimating number 1 hasn't been a winning proposal. Till them em and risky assets rally."
Key Quotes:
"From Paul's test of pain to prove his humanity to a witch or his litany 'I must not fear, fear is the mind killer' self-confidence plays a secondary role to the inhibited truth that much is out of our control."
"Fear is both:
1. instantaneous (local implied risk aversion via pratt theorem)
2. a temporal resolution, when the utility is non time separable
3. a ghastly habit of leading to poor decision making as the time horizon narrows boosted by adrenaline. For the quantsy version it would be a high intensity or activity in the time clock used for example in combination with Levy processes
4. leads to break down in cooperative games (e.g. dictatorships, 'collaboration')."
"Fear is the mind bender if you are overly long usd as risk mgt which had hammered bonds does another trip through fx for a day or so (point 1).
The slowdown in the US is a short cycle in what is widely presumed a long term subdued growth potential suggesting we have learned little today we didn't know (point 2, resolution of risk is rapid).
"Poor decision making is what methodology, experience, paper and systematic trading try to stem. By valuation standards we are a tad above short term fair value in eurusd quite below cyclical models that are still heading lower following spot after a structural ECB shock to the original equilibrium. Demand to buy eurusd on dips is likely now rising at levels above parity for long term investors but they will be wary of underestimating an overplay in bearish us sentiment."
"Has the cooperative equilibrium been shaken? Is the usd story dead? Have a sip of coffee and wait to buy USD at higher levels vs EUR. Under-estimating number 1 hasn't been a winning proposal. Till them em and risky assets rally."