credit trading? itraxx? cdx? anyone?
- Thread starter man
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actually this is the reason why i currently look at it. it looks like recent moves of implied corrs hit some of the equity buyers quite a bit. nevertheless i am still not sure what to think about this market as whole (most important reason is that so far i never looked in detail on the tranched indices). i mean the whole concept of implied correlation is really subject to discussion. let me explain:
1. the models behind cdos are substantially complex, maybe not conceptually, but by the shere number of varibles. hundred obligors, hundred recovery assumptions, (100*(100-1))/2 pairwise correlations. sure you can reduce nmber of variables by aggregation, but if you have it on your book, you are long the whole complexity, not jsut your assumptions.
2. using correlation as the "implied" output, leaving all others, (defaults, recoveries) constant is a fine solution. another would be impied avg default rate or implied recovery rates. implied correlation does sound better, but it is not probably not reflecting true correlation of companies.
just look at five years senior pieces, once with basis corr, once with gaussian view: 0.6 corr vs 0.25 = gimme a break when you talk about "implieds". can you imagine that black scholes says "15%" IV and cox rubinstein claims "30%"?
3. in a "normal" market, like lets say, stock indices, you have a derviatives market that has some natural link to the spot market. and they interact pretty much straight forward (future price being a more or less exact function of spot circumstances). in credit you have a whole part of the market absent, namely the buy side of synthetic tranches. clients of investment banks buy these tranches, yet teh banks themselves hedge via the indices. thus the indices see one part of the synthetic market, but not the other.
all these issues make me wonder if the credit market will react in a mean reverting way, after some activity took place in one part of the corr-curve ... or if it is more a panic stampede once people realise that the science is not what they hoped it would be.
actually i have not idea how smart the funds are that recently bought equity. i mean in the end they are short defaults and we haven't seen too many ... and yes, they are long corr, but one really has to worry if they get shaken so "easily" ...
1. the models behind cdos are substantially complex, maybe not conceptually, but by the shere number of varibles. hundred obligors, hundred recovery assumptions, (100*(100-1))/2 pairwise correlations. sure you can reduce nmber of variables by aggregation, but if you have it on your book, you are long the whole complexity, not jsut your assumptions.
2. using correlation as the "implied" output, leaving all others, (defaults, recoveries) constant is a fine solution. another would be impied avg default rate or implied recovery rates. implied correlation does sound better, but it is not probably not reflecting true correlation of companies.
just look at five years senior pieces, once with basis corr, once with gaussian view: 0.6 corr vs 0.25 = gimme a break when you talk about "implieds". can you imagine that black scholes says "15%" IV and cox rubinstein claims "30%"?
3. in a "normal" market, like lets say, stock indices, you have a derviatives market that has some natural link to the spot market. and they interact pretty much straight forward (future price being a more or less exact function of spot circumstances). in credit you have a whole part of the market absent, namely the buy side of synthetic tranches. clients of investment banks buy these tranches, yet teh banks themselves hedge via the indices. thus the indices see one part of the synthetic market, but not the other.
all these issues make me wonder if the credit market will react in a mean reverting way, after some activity took place in one part of the corr-curve ... or if it is more a panic stampede once people realise that the science is not what they hoped it would be.
actually i have not idea how smart the funds are that recently bought equity. i mean in the end they are short defaults and we haven't seen too many ... and yes, they are long corr, but one really has to worry if they get shaken so "easily" ...
I really laughed at the comment about IV being 15% or 30%. I take your point about about some many variable. If you ask me IMHO there is not enough data to estimate correlations. The correct mathematical place to look is into the theory of copula's.
I am extremely skeptical of pure mathematical traders. Anyone who takes a huge leveraged position based on a "model" needs his head read.
Remember LTCM with we are vacuuming pennies do me a favour.
The credit markets scare me because I lot of the buy side are funds or banks that think they are clever. Basically over confident in their own ability. The traders concerned probably figure well if I make money I get a bonus if I blow up I write a book about it.
Still would love to know what names to look at if these markets blow and credit spreads blow up, any ideas.
I read that GM's bonds are trading at a spread that implies a cumulative probability of default of 54% over the next five years. Is this really the probability of default or is the reality a lot lower.
I might have a small balance sheet but can still trade single names via their corporate debt or via the convertibles.
Not sure if its true but people are banding around 70% of convertibles in the hands of Hedge funds. Will be some lovely opportunities if their are forced liquidations.
Again which converts are relatively liquid?
personally I don't think we have hit a crises yet, we need a public very big bad failure of a bank HF etc first. Then be ready to pick up some bargains.
If I remember correctly Buffet offered LTCM R600m to take over their book unseen. Would have double his money in a few months. Of course they didn't take him up on it. Nice try though
I am extremely skeptical of pure mathematical traders. Anyone who takes a huge leveraged position based on a "model" needs his head read.
Remember LTCM with we are vacuuming pennies do me a favour.
The credit markets scare me because I lot of the buy side are funds or banks that think they are clever. Basically over confident in their own ability. The traders concerned probably figure well if I make money I get a bonus if I blow up I write a book about it.
Still would love to know what names to look at if these markets blow and credit spreads blow up, any ideas.
I read that GM's bonds are trading at a spread that implies a cumulative probability of default of 54% over the next five years. Is this really the probability of default or is the reality a lot lower.
I might have a small balance sheet but can still trade single names via their corporate debt or via the convertibles.
Not sure if its true but people are banding around 70% of convertibles in the hands of Hedge funds. Will be some lovely opportunities if their are forced liquidations.
Again which converts are relatively liquid?
personally I don't think we have hit a crises yet, we need a public very big bad failure of a bank HF etc first. Then be ready to pick up some bargains.
If I remember correctly Buffet offered LTCM R600m to take over their book unseen. Would have double his money in a few months. Of course they didn't take him up on it. Nice try though
Quote from dont:
I really laughed at the comment about IV being 15% or 30%. I take your point about about some many variable. If you ask me IMHO there is not enough data to estimate correlations. The correct mathematical place to look is into the theory of copula's.
I am extremely skeptical of pure mathematical traders. Anyone who takes a huge leveraged position based on a "model" needs his head read.
Remember LTCM with we are vacuuming pennies do me a favour.
The credit markets scare me because I lot of the buy side are funds or banks that think they are clever. Basically over confident in their own ability. The traders concerned probably figure well if I make money I get a bonus if I blow up I write a book about it.
Still would love to know what names to look at if these markets blow and credit spreads blow up, any ideas.
I read that GM's bonds are trading at a spread that implies a cumulative probability of default of 54% over the next five years. Is this really the probability of default or is the reality a lot lower.
I might have a small balance sheet but can still trade single names via their corporate debt or via the convertibles.
Not sure if its true but people are banding around 70% of convertibles in the hands of Hedge funds. Will be some lovely opportunities if their are forced liquidations.
Again which converts are relatively liquid?
personally I don't think we have hit a crises yet, we need a public very big bad failure of a bank HF etc first. Then be ready to pick up some bargains.
If I remember correctly Buffet offered LTCM R600m to take over their book unseen. Would have double his money in a few months. Of course they didn't take him up on it. Nice try though
i do not think the data is really the key issue. it is simply that correlation is too volatile. estimating it over 5 years is next to guessing.
i think a smart investment bank has an edge since they are bigger than any fund, thus they call their desk covering a certain company or industry and can derive a much more precise picture on corr, default and so forth.
LTCM is a special thing. too much ambition plus five sigma event ... well. i would not damn the principle (mathematical?) approach due to that. ...