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From a modeling point of view, here are my primary assumptions for Monday:

a) I would expect the US$ to depreciate and crude oil to rise in the long term.

b) Expect crude oil to dip in the short run but rise in the long run

c) Would also expect correlation with Gold to dip in the short run and rise in the long run

How would you defend or challenge the above assumptions?

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This doesn't look like a real question; it sounds like you're attempting to advertise your business services. – chrisaycock♦ Aug 6 '11 at 12:59
Chris, this was a genuine question. How would I advertise my services (risk systems) through a question on a trading model. And the comments to Owe's question were made to answer the queries he had raised. Rather than closing the discussion you could have asked what I could have done to further clarify it. – Finance Mentor Aug 7 '11 at 6:16
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This question is a poll/opinion. From the FAQ: Chatty, open-ended questions diminish the usefulness of our site and push other questions off the front page. – Joshua Ulrich Aug 7 '11 at 12:59
I think my answer showed that a clear, testable question refering to the theme of quant.SE could be distilled from the original question. Insofar I think a request for clarification would have served this site better than closing it at once. – Owe Jessen Aug 7 '11 at 13:17
Josh, I have asked about the impact of a specific event on a specific day for a specific commodity. How is this chatty and open ended? Some of our answers are based on our opinions which is what I am/was interested in. The question was asked as part of the pre-work I was doing for a post.You can however go ahead and state that there is no room for trading related questions on this Quant site and I would understand that (wouldn't agree but I would see your point of view). – Finance Mentor Aug 7 '11 at 17:35

closed as not a real question by Joshua Ulrich, chrisaycock♦ Aug 6 '11 at 12:55

It's difficult to tell what is being asked here. This question is ambiguous, vague, incomplete, overly broad, or rhetorical and cannot be reasonably answered in its current form. For help clarifying this question so that it can be reopened, see the FAQ.

1 Answer

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In the formulation of your hypotheses you had to assume that this is relevant news to the market with an imidiate effect on prices and volatilities, in other words that a rating action leads to a structural break, not the other way round (that a structural break leads to rating action). The problem in testing will probably be a too small sample within this particular dataset - too few rating actions of countries with relevant size to move the price of commodities.

My idea would be to test three time-series pairwise: First test structural breaks in CDS against Rating Actions to get the lag or lead of the time-series. Second, test structural breaks in CDS against structural breaks in Commodities to get the lag or lead of the time series. Then, if for example you get a lag of 3 Months for Rating Actions to CDS, and a lead of 4 Months for CDS against Commodities, you might conclude that Rating Actions lead relative to structural breaks in commodities.

With regard to your concrete predictions: Whats the reasoning for expecting a short-run dip in oil, and a decline in correlation for gold?

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Thank you Jessen. – Finance Mentor Aug 6 '11 at 9:40
Building a basic trading model for the next 3 - 4 weeks. I have assumed that traders have factored in the news and the good ones have already taken position they wanted to take before the news broke. The question however is how would markets play out over the next 5 - 7 days. While from a regulatory capital point of view there is no impact (as quoted), there will be some additional frictional costs in financing against risk free bonds. Will that trigger a further flight to safety and a reduction in overall exposure to risky assets (commodities). – Finance Mentor Aug 6 '11 at 9:47
a) Will investor drift back to the US currency or look for alternate risk free assets such as Gold. b) Given the turmoil in Europe (Euro) and Japan (Yen), is Gold the primary parking lot while markets wait out volatility. c) Will there or will there not be a resulting slow down in the US economy given the rating cut? If yes then oil prices should reflect that in the short term? In the long term the relative value argument will hold and Oil like all other commodities should rise. If Gold and Oil move in opposite directions there should be some variation in projected correlation. – Finance Mentor Aug 6 '11 at 9:51

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