Economic Growth and Yield Spreads on Debt paper – Back to School

Recently sharing and discussing on the economic growth and the debt market yield spread impact recalled me some work I did in the past and its worth sharing,

The abstract was based on the evidence that yield spread can serve as a leading indicator of economic activity.It’s important to understand few basic concepts before moving forward:

YIELD SPREAD: The difference between yield of long-term debt and short-term debt instrument is known as yield spread. Higher the difference between instruments greater will be the yield spread.

For example, if the 05-year Treasury bond is at 3% and the 20-year Treasury bond is at 4%, the yield spread between the two debt instruments is 1% (4% – 3%).

The case of Flash Crash Trader

The technology may have advanced to HFT Trading, algorithmic trading but the rogue inside the human will always overpower the technology.

Let’s try to understand the case of Navinder Singh Sarao , Has he became the scapegoat ?

According to the justice department Mr Sarao and his firm is guilty of Nav Sarao Futures, made £26m ($40m) illegally over five years.

He has been accused of using an “automated trading program” to manipulate markets, and contributing to the flash crash of 6 May 2010. On that day, the Dow Jones index lost 700 points in a matter of minutes – wiping about $800bn off the value of US shares – before recovering just as quickly.

Are Markets Overvalued?

Very common statement from the market analysts these days for the Indian stock market.  India Overvalued but the rally will continue.  Although based on valuation metrics, Indian equities are now trading at a significant premium to stocks in other EM countries some analyst claim this too.

We have consistently outperformed the market! … Sensex is now overvalued.

“The stock market is overvalued.” “The stock market is undervalued.”

Which one of these statements is true? Well I don’t know.  May be both

Thanks to quirks of the most popular way of measuring a stock’s valuation: the price/earnings ratio.

While no one disagrees about what the “P” is when calculating the ratio, there is no consensus on how to

Do Professionals really beat the market? Or it’s a Paradox

How concerned should we be about the cyclical performance of fund managers or of our own portfolio? 

Performance differences, relative to a market benchmark, don’t really matter over the long-term. Short-term (months or years) under-performance is a fact of life if you are trying to beat the market.

Investors are better off investing in an index fund if they can’t deal with this fact. Otherwise, with human behavior being what it is, investors who can’t accept this fact will buy high and sell low –destroying their wealth in the process.

Volatility and the cyclical performance of active management (i.e. investors trying to beat the market) are really blessings in disguise for long-term investors. 

Market Efficiency

I dare to write on this topic as it is the most intense and debatable topic in the financial markets over the years.

The author of “Fooled by Randomness” and “The Black Swan” Nassim Taleb became the anti-theorist in finance arguing that the Nobel committee should be sued for awarding Harry Markowitz, Bill Sharpe and Merton Miller http://www.bloomberg.com/news/2010-10-08/taleb-says-crisis-makes-nobel-panel-liable-for-legitimizing-economists.html

But the Guru of Corporate finance Aswath Damodaran did a posting replying to him on the market efficiency models. http://aswathdamodaran.blogspot.com/2010/10/nassim-taleb-and-nobel-committee.html