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seen Dec 30 '12 at 22:29

Dec
29
comment How to interpret/use VaR and Standard Deviation?
Markets have a tendency to rally for long periods of time, edging higher and higher, bit by bit, and correct in a short period. Maybe this is why volatility rises on the downside than on the upside. The skew you mentioned is also another good reason.
Dec
29
comment How to interpret/use VaR and Standard Deviation?
I think your giving to much credit to investors/traders. I don't think implied vol is more forward looking than historical. If anything the historical vol-to-implied vol spread is a great excessive sentiment indicator. Though your definitely right, the strike to vol chart on the SPY is skewed on the downside -- people are more willing to bid up calls to insure their portfolio. Though I am still puzzled as to why volatility moves differently for different assets and if its really correct to compare different assets on this one risk measure.
Dec
29
comment How to interpret/use VaR and Standard Deviation?
Freddy I've built several trading models based on the difference of actual & expected vol, I know they are different. I pointed out that while they are different, their difference is only mean stationary -- that's why spread traders love trading VOL because they have that mean reverting property. Those VOL traders your alluding too wouldn't have much to feed their family if it weren't for that property alone. Calling them "different animals" is a little further than I would have gone. I would have said more like: "same animal but different species".
Dec
27
comment How to interpret/use VaR and Standard Deviation?
Freddy, I was referring to historical Vol but that shouldn't matter. Historical Vol and Implied Vol are very highly correlated, I think your splitting hairs at this point. The difference between the two is mean stationary -- your not going to see major trend divergences between historical vol and implied vol. Volatility eludes the heck out of me. Volatility doesn't rise for major moves on the upside but it does on moves to the downside. It's negatively correlated to risky assets and positively correlated to safe haven assets. How it became a risk measures blows my mind.
Dec
25
comment How to interpret/use VaR and Standard Deviation?
Thank you for the response Freddy. My problem with volatility is simple, volatility can either be good or bad. If a stock,eg, breaks out to the upside and on several large range days, isn't that a large deviation from the mean and therefore would raise volatility?? Yet, when I calculate volatility for stocks it only rises when the stock goes down not up -- this behaivor is really pecular. Not to mention, safe haven assets like the dollar (DXY) and the US Treasuries have higher volatility when their rallying!!! So how does one really compare volatility for different assets?
Dec
11
comment Interpretation of Macaulay Duration
Freddy, maybe I should just give up on an intuitive meaning for Mac. Duration and just think of it as a "Weighted Average of Cash Flows Across Time" = literally the placement of that triangle such that the big ball (principal +final cash) is balanced on a swing (the length of maturity of the bond) such that the smaller cash flows are balanced on it. Though I am not sure about your comment about the FED's QE program extending MD. Are you saying newly issued bonds now have higher MD's? I thought by sucking longer dated bonds from the market it would reduce overall MD in the market.
Dec
9
comment Interpretation of Macaulay Duration
and B a Mac Duration of 5 yrs? Can we compare the riskiness of two different bonds with Mac. Duration? OR.. is Mac. Duration (since its always less than the time maturity of the bond) cited as a ratio relative to the time maturity. So 1.78/2=.89 which means your taking too much risk before receiving your capital investment.I appreciate the description Freddy but I am still having a hard time understanding "the meaning behind the idea".
Dec
9
comment Interpretation of Macaulay Duration
Bonds are bought in 1K blocks, not a 100 but it shouldnt matter. If the price of 1305 for 1000 par, 130.5 for 100 par. I know the math behind Mac. Duration, i understand it's a weighted average of maturity of the CF, but I still don't understand the conceptual meaning behind it. Modified Duration/Efficitive Duration make total sense. However, I noticed some PM cite the duration of their bond protfolio in years. Can anyone really make sense of Mac. Duration on its own? Could someone discern between the level of risk between two portfolios A & B, in which A has a Mac. Duration of 3yr
Dec
9
comment Interpretation of Macaulay Duration
Hi Phi, thank you very much for the response!! This helps. Though I still have a couple of question. I actually priced this bond in the example diagram you posted. The bond costs 1305 dollar, so its trading at a premium to par. Lets say you buy the bond for 1305 dollars. the NPV all the cash flows 1.78 yrs into the bond total 288 dollars (CF1:98,CF2:96,CF3:94) . This is of course well before you receive the last coupon payment and the principal invested. How is 1.78 the point your capital is returned?