Business Cycle Econometrics

C

claywilk

The most profitable trading I have ever done has been founded on establishing a good real time understanding of the business cycle. Sometimes I really get a good handle on it, other times I seem to be in sync with the predominant opinion whether it is right or wrong, and at other times I feel completely lost. While the starting place is econometric modeling, my ultimate goal is to be able to look at the markets in real time and see the business cycle, see the one market out of sync, know the inter-market relationships well enough to KNOW which ones are correcting and which ones are reversing, be able to look at the bond market, stock market, currency markets, and energy markets and know exactly where I am in the business cycle by their interplay. I am not looking for pat answers to complicated questions nor simplistic uni-directional supply/demand mumbo jumbo. I am looking for answers that you will not find in books because the people that know it have no need to publish it. I want to truly understand the economy and its various market in real time. Are there any other people on this board with similar fascinations/goals? Can we start an econometric discussion that is worthy as a trading think tank?
 
[My experience is in Asian markets but] I have found it better to look at price action in early stage stocks across markets than relying on economic numbers. This is a much more reliable guide that will allow you to get in with a much better risk:reward. Look for markets where the listed stocks are predominently small caps with owner managers who are active traders in their stock. Institutionally dominated markets lag.

Marc Faber is good on the stages, albeit from a qualititative rather than econometric slant.

Likewise at the end it is price action in certain stocks that gives an early exit. There are a handful of things classed as fundamentals that can indicate both the start of recovery and the end of the cycle. GDP and others are lagging indicators.
 
Advanced Trading Rules, Second Edition (Quantitative Finance) by Emmanual Acar (Editor), Stephen Satchell (Editor)

Applied Quantitative Methods for Trading and Investment (The Wiley Finance Series)
by Christian L. Dunis (Editor), Jason Laws (Editor), Patrick Naïm (Editor)

Market Models: A Guide to Financial Data Analysis
by Carol Alexander

Any comments on these books?
 
Quote from claywilk:

The most profitable trading I have ever done has been founded on establishing a good real time understanding of the business cycle. Sometimes I really get a good handle on it, other times I seem to be in sync with the predominant opinion whether it is right or wrong, and at other times I feel completely lost. While the starting place is econometric modeling, my ultimate goal is to be able to look at the markets in real time and see the business cycle, see the one market out of sync, know the inter-market relationships well enough to KNOW which ones are correcting and which ones are reversing, be able to look at the bond market, stock market, currency markets, and energy markets and know exactly where I am in the business cycle by their interplay. I am not looking for pat answers to complicated questions nor simplistic uni-directional supply/demand mumbo jumbo. I am looking for answers that you will not find in books because the people that know it have no need to publish it. I want to truly understand the economy and its various market in real time. Are there any other people on this board with similar fascinations/goals? Can we start an econometric discussion that is worthy as a trading think tank?
More...
def interested but, to the extent i may be able to contribute, how do you see this working? i mean, difficult to avoid lengthy presentation of views don't you think? perhaps if you'd like to go first and we can adjust the 'format' as we go along? what do u think
 
Hey 2cents! I would love to start this off. To me the most important things to do are to ask questions about certain intermarket relationships, then develop hypotheses that should be reflected in other markets and test them that way. For starters, I would contend that the most important markets to include would be the dollar, bonds, stocks (index), oil, and maybe copper. Starting with the most important relationship, Bond/Dollar. Understanding this relationship is critical. Consider this, it is assumed that a currency gains its strength from higher interest rates, but it is also generally accepted that a stronger dollar is good for bonds and weaker dollar is bad for bonds. hrrr? Which is true? Over the last 20 years you may be inclined to say that the only real dollar valuation associated with interest rates were valuations that began AFTER the trough in bonds. The obvious answer for this being international investors seeking gains in bond market. However, I cannot accept such a simplistic answer. Surely purely speculative capital flows cannot so determine the dollars value. If bonds are rallying as the economy slows, what other factors would contribute to this? Less consumer spending on imported items? Like other markets i have noticed times where the daily direction may have a positive correlation while the larger trends (weekly/monthly) themselves have a negative correlation. And that periodically the relationships may shift from a positive daily correlation/negative weekly correlation to a negative daily correlation/positive weekly correlation. Rules need to be established that determine what the underlying business conditions are that create these varying relationships. I will be working on this (AGAIN, ha) the next several days. Do you have GDP data to refer to? If not I can provide.
 

Attachments

Quote from claywilk:

1. To me the most important things to do are to ask questions about certain intermarket relationships, then develop hypotheses that should be reflected in other markets and test them that way.

2. For starters, I would contend that the most important markets to include would be the dollar, bonds, stocks (index), oil, and maybe copper.

3. Starting with the most important relationship, Bond/Dollar. Understanding this relationship is critical. Consider this, it is assumed that a currency gains its strength from higher interest rates, but it is also generally accepted that a stronger dollar is good for bonds and weaker dollar is bad for bonds. hrrr? Which is true?

4. Over the last 20 years you may be inclined to say that the only real dollar valuation associated with interest rates were valuations that began AFTER the trough in bonds.

5. The obvious answer for this being international investors seeking gains in bond market. However, I cannot accept such a simplistic answer. Surely purely speculative capital flows cannot so determine the dollars value.

6. If bonds are rallying as the economy slows, what other factors would contribute to this? Less consumer spending on imported items?

7. Like other markets i have noticed times where the daily direction may have a positive correlation while the larger trends (weekly/monthly) themselves have a negative correlation. And that periodically the relationships may shift from a positive daily correlation/negative weekly correlation to a negative daily correlation/positive weekly correlation.

8. Rules need to be established that determine what the underlying business conditions are that create these varying relationships. I will be working on this (AGAIN, ha) the next several days.

9. Do you have GDP data to refer to? If not I can provide.
More...
boy this is tough... ok, still struggling to organize my thoughts, here's my best shot for now... lemme know what u think...

2. ok with copper as a leading indicator for metals (and links to growth & development, emerging mkts notably) but i'd include gold/silver as well since they obey different dynamics, 'irrational' ones to some extent, but that's another pulse & dimension of the 'mkt' to be taken into consideration methinks... real estate indicators shld be included too, huge mkt & knock-on effects, how about new home sales?

3. i'm an fx guy. if u mean strength as in high DXY level as your chart seems to indicate, short answer is, in my experience neither is true, even if you were talking about real interest rates... if u mean strength as in the CB/Fed has got inflation expectations under ctrl and the country's not also slipping into recession, then again, neither is true. as far as huge & steady capital flows are concerned, what matters i'd say, if a few words can ever capture that, is more the consensus outlook for real & nominal growth in the leading size economies (G8 + China & India), and the anticipated path & rationale (accomodation removal, inflation/deflation risk fighting, etc) for short term (<2yrs) IR differentials between US & EC debt mkts (Japan's debt mkt is sizeable but not a contender). fairly topdown and somewhat asymetrical but that's how i believe the big money is looking at it. as for the 'other' 95% of purely speculative FX daily transaction volumes, they increase vol & range and cause the short-term (<3mths) gyrations that we can all see, but it's unclear whether they do anymore than that...

4. not sure what u mean here, please elaborate

5. agree

6. u mean 10yr yields going down as (real?) gdp growth is decelerating? thing is, i am not aware of a correlation here but i have not explored either. on yield spreads and real gdp growth, perhaps, but even then... for instance http://www.boj.or.jp/en/type/ronbun/ron/wps/kako/data/iwp00e03.pdf go to p7 etc... i am not a believer...

7&8. interesting, please elaborate

9. yes i have pretty much everything on bloomberg thks

apologies for not contributing much at all here... i do have a few research notes that you may find of interest but we'd need to get down to more defined sets of potential relationships. fwiw, what i am looking at right now is more:
. IR levels at which commodities mkts are likely to react (e.g. Frankel http://www.google.com/search?hl=en&...,SUNA:en&q=frankel+interest+rates+commodities )
. intra-day correlations & ripples resulting from sharp moves on oil, spot gold (xauusd) and $ pairs (caused by geopolitical events, hurricane scares etc)
 
Hey 2cents Thanks for the articles they do look very interesting. I apologize for my lack of attention to this, I have been consumed with business the last few days ( I own a mortage company). Also, as far as trading goes a new dynamic has entered the arena which mixes things up quite a bit. WWIII. I was ready to short oil and just looked at the chart and am afraid I may be a touch behind the curve. My view of the world has tensions between Arabia and Iran meaning lower prices UNLESS they turn on each others fields. The next OPEC meeting will not be very fruitful for them. Distrust is in the air! This accompanied by better fundementals by and large should be good for bonds ( and mortgages, LOL) and I would think at least hold the dollar steady if not gain some strength from safe harbor effect. Far as stocks, most of them should not appreciate REAL war. Saber rattling good for us on several fronts ( lower oil, better interest rates, etc) but real war may not mean the same.
 
You must log in or register to reply here.
Back
Top