Quantitative investment and trading ideas, research, and analysis.
I was thinking that there seems to be an inverse relationship between the US Dollar and the stock market lately. Seems like stocks can't go up unless the dollar goes down. Market is up X% on the year and the dollar is down by the same amount. Market makes new highs and Dollar makes new lows. And everyday is the same story. Is there a way to quantify this relationship? Maybe they are cointegrated?
Dear anonymous,If it were true that US stock index and US dollar had an inverse relationship, you might find that the euro futures cointegrates with the stock index. However, I am skeptical that this is true over the long term. It is probably just a coincidence of the last few months -- let me know if you find the spread truly mean-reverting!Ernie
I know long term there is no correlation, but lately it's been happening so often that it feels non random. Even today the market is up .5% and the dollar is down .5%.I am a Canadian who trades the US markets and who is very tired of watching his US account plummet in Canadian dollar terms and is desperately trying to find a way to model the US dollar so I can hedge away some of this risk.I am no good at trading currencies and unfortunately this one has been collapsing on me for years now.What factors would you look at when trying to model the US dollar?
To model exchange rate, see the article from Economist byButtonwood"Profiting from exchange rates"Apr 4th 2007 Ernie
Dr. Chan,What book would you recommend about derivatives, especially futures and options? I hope to start trading commodity futures as well as selling options on futures shortly but feel that I could benefit from a more thourough understanding of these financial instruments.Also, what is your general policy regarding options? Do you believe in selling options rather then buying them?Thanks
Dear Anonymous,The standard textbook on options and futures is John Hull's book Options, Futures and Other Derivatives (6th Edition). I have found its chapters on pricing futures fairly readable. The chapters on options require fairly solid math background though.I don't trade options myself, so I don't have much of an informed opinion on them.Hope this helps!Ernie
Here is an interesting article on the famous Commodity Corp. that was published in Times in 1981:http://www.turtletrader.com/comm-corp.html A computer programme called TCS is mentionned:"Vannerson's research produced a "technical computer system," or TCS -- a trendfollowing scheme that, unlike fundamental analysis, doesn't predict where prices will eventually go, but signals when to hop in and out to catch short moves. Naturally, the longer the trend, the better. Commodities Corp. set up a TCS fund in 1970 to trade 15 commodities, including cocoa, copper, cotton, and soybeans."Do you know what type of programme TCS is? It doesn't seem to have been a very complicated programme since most people had little expertise in programming. Also, it is claimed that it was immensely successful.Thanks
Dear Anonymous,I don't know specifically what TCS is. However, one of the Turtle Traders (Curtis Faith) recently published a book called Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders. Most if not all of the strategies in this book are trend-following. They are all quite simple and profitable -- however, given the commodities boom in the last few years, it is hard to tell whether they beat a buy-and-hold strategy in terms of Sharpe ratio.Ernie
Economist article, Thanks ernie.http://www.economist.com/finance/displaystory.cfm?story_id=8968456
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