Fortis certainly thinks so.
The bankâs analysis, which is based on Didier Sornetteâs research into bubbles (think US housing and oil circa 2008), holds that recent increases in CDS spreads in both US and European markets have reached unsustainable levels and are due for a correction - sharpish.
Per the report, by Peter Cauwels, Ken Bastiaensen and Amjed Younis:
"Based on our findings, it is likely that the peak for the 4 major indices will be reached between the 2nd and the 12th of February, and as a result they will fall. This is particularly significant since these indices are closely watched as a âfear gaugeâ for Financial Markets, alongside the VIX Index, Libor-OIS spread and the spread between German bond yields versus other Euro Area government yields."
Their conclusion is based, in part, on the application of the mathematical model of Sornetteâs general theory of crashes, which they backtested using the performance of the US dollar weighted average as a data series:
On December 5th, the toolset detected a bubble-like behavior and reported December 10th as most likely crash
Starting on December 9th, the DXY began a consecutive drop of more than 8% until December 17th. This drawdown13 was the largest since the start of the daily DXY index in 197114 and can thus statistically be considered a crash.
In addition to this forward test, a wide range of historical crashes15 have been analysed and the results used for calibration.
The formula, which according to Fortis represents a so-called âlog periodic power lawâ (LPPL) and is given by:
p(t) ≈ A + B(tc - t)-β + C(tc - t)-β cos(ω log(tc - t) +ϕ )
Fortis believes four of the major CDS indices - the iTraxx Crossover and Main, and the CDX High Yield and Investment Grade - which all recently hit record highs, show a âbubble-like formation in spreadsâ, per the graphs below:
http://ftalphaville.ft.com/blog/2009/01/27/51739/will-cds-spreads-tumble-in-february/
The bankâs analysis, which is based on Didier Sornetteâs research into bubbles (think US housing and oil circa 2008), holds that recent increases in CDS spreads in both US and European markets have reached unsustainable levels and are due for a correction - sharpish.
Per the report, by Peter Cauwels, Ken Bastiaensen and Amjed Younis:
"Based on our findings, it is likely that the peak for the 4 major indices will be reached between the 2nd and the 12th of February, and as a result they will fall. This is particularly significant since these indices are closely watched as a âfear gaugeâ for Financial Markets, alongside the VIX Index, Libor-OIS spread and the spread between German bond yields versus other Euro Area government yields."
Their conclusion is based, in part, on the application of the mathematical model of Sornetteâs general theory of crashes, which they backtested using the performance of the US dollar weighted average as a data series:
On December 5th, the toolset detected a bubble-like behavior and reported December 10th as most likely crash
Starting on December 9th, the DXY began a consecutive drop of more than 8% until December 17th. This drawdown13 was the largest since the start of the daily DXY index in 197114 and can thus statistically be considered a crash.
In addition to this forward test, a wide range of historical crashes15 have been analysed and the results used for calibration.
The formula, which according to Fortis represents a so-called âlog periodic power lawâ (LPPL) and is given by:
p(t) ≈ A + B(tc - t)-β + C(tc - t)-β cos(ω log(tc - t) +ϕ )
Fortis believes four of the major CDS indices - the iTraxx Crossover and Main, and the CDX High Yield and Investment Grade - which all recently hit record highs, show a âbubble-like formation in spreadsâ, per the graphs below:
http://ftalphaville.ft.com/blog/2009/01/27/51739/will-cds-spreads-tumble-in-february/