Trading Currency Flows and More on Currency Premiums
Last week we discussed a trading strategy based on macro policy interventions -
This week, we dive into a trading strategy based on equity-based capital flows in currency markets. Here is a preview of the (log) return profile:
We also discuss formally the behavior of currencies from a risk-premium perspective. The idea that risk premiums arise from the desire of utility maximizing consumers with concave utility functions to smooth consumption is considered.
I want to include an aside - as many of you know since the turn of July we have changed the style of our posts - to be more in-depth and gradually amp up the level of discussion and analysis in our work to cater to a more mature audience. This change was made possible by me now basically ‘slinging my own capital’, giving me more freedom to conduct personal research endeavors - as well as the freedom to share with you all. With more time to focus on this platform and my own quant systems, I look to keep scaling up both the trading and research operations.
As we continue to do so - my plan is to continue increasing the costs of subscription (so far we have done this twice since launch last year). This helps me in two ways: (i) the obvious increase in income which capitalizes any marginal costs of production from scaling up and (ii) essentially refines my audience to a more sophisticated group of traders who all together elevate not only the discussion on the blog but in fact influences my own thinking about markets. From a administrative perspective, having a smaller audience is easier. From a trader perspective, having a more refined audience pushes my thought processes and output quality.
However, existing and already paying subscribers will not at all be affected by these changes. This means 2 things: 1) if you are already an existing subscriber who intend to stay subscribed - make sure your subscription does not get auto-cancelled due to billing issues, since re-subscription means you have to pay the new (higher) price! 2) If you are still on the fence about us (and cost is your main consideration) and eventually make the decision to be a paying subscriber - there are no promises that the costs would be as was.
Here is an interesting thing I miss about working in the hedge-fund setup though: to walk into work, sit down with traders and start writing equations and ideas on the glass board (like in The Accountant) and getting your ideas destroyed by other people. Now, for me it is just typing out my thoughts on my laptop and then maybe some calls with ex-contacts to bounce ideas.
One of my fondest memory is my first strategy pitch: I was presenting to the senior quant PM and his partner listening in (private equity manager) a commodities futures strategy. It was somewhat decent IMO (.7 - 1.0) Sharpe strategy, and on my slide deck I put ‘High Risk-Adjusted Returns’ like a salesman - it is my pitch after all. The quant stopped the presentation and asked ‘how is that high?’ Then I was like … uhh uhm I don’t know man… and on the spot - during my presentation I changed the wording to `moderate’ risk-adjusted return trading strategy. Imagine that…
So, here is my paper on a `moderate’ risk-adjusted return strategy for paid readers on the cross section of FX returns: