Butter, I think I found a methodology that can tell me what is the 2012 total return for a Greek bond holder. According to the Central bank at year 2011, the 10y was at 43.94 (100 par) with a 21.14% yield to maturity At 2012 year end, the 10y was at : 43.62 (100 par) 13.33% yield to maturity One can quickly notice that the bond price didn't change much, but the yield went down a lot. Normally this would indicate a rally in the bond but in this case the drop was due to the bond reestructuring So the total loss to the investor would be the net present value difference between the year end 2011 vs year end 2012 bonds? I don't think I can do that because it they didn't do a 1-1 bond transfer, it was a mix of stuff that was offered to the bondholders "(i)One and two year notes issued by the EFSF, amounting to 15 per cent of the old debt’s face value; (ii) 20 new government bonds maturing between 2023 and 2042, amounting to 31.5 per cent of the old debt’s face value, with annual coupons between 2 and 4.3 per cent. These bonds were issued under English law and governed by a “co-financing agreement” with the EFSF which instituted a sharing provision for the private bondholders vis-à-vis the EFSF (see below); (iii) A GDP-linked security which could provide an extra payment stream of up to one percentage point of the face value of the outstanding new bonds if GDP exceeded a specified target path (roughly in line with the IMF’s medium and long term growth projections for Greece). (iv) Compensation for any accrued interest still owed by the old bonds, in the form of 6-month EFSF notes" The authors of the study valued the total of these securities at around 22 cents on the previous face value bond. So what I'm going to do is to consider that the investor got that mix of shit and then sold all the unusual things and bought the 10y bond right at the end of march 2012. Why? That's a form of rebalancing, the reestructuring changed the exposures (by adding EFSF bonds and other things) and the investor only wanted 10y Greek bonds, so he was forced to rebalance ahead of time There was a 60% rally in the 10y in these new 10y bonds between the end of march 2012(when I have data from the central bank of the first market price of the bond) and the year end 2012, plus there was a 6% implicit coupon. So the total return after the reestructuring was around 64%. But that 22 cents worth of stuff assumed a discount rate of 15.3% (by the authors), by march end 2012 the yield was 22.86%(I think the bonds sold off between the first day of trade and the end of the month). The authors show that the valuation wasn't super sensitive to the discount rate If I assume a 23% discount rate, I would get maybe a new bond equivalent of 19c of face value of the previous bonds. Those 19c equivalent of old bonds then returned 64%. The result is 31.16 So the transformation suffered by Greek bondholders appears that was: Year end 2011 they owned 10y bonds at a price of 43.94 (100 par) with a 21.14% yield At year end 2012 they owned new bonds worth 31.16 of old bonds face value (100 par value) but with a reduced yield of 13.333% How much that loss represented? That $64 to $50 represents a -21% loss, after 2012 I can use my data as it represents the same bond (under english law now) and it's changes over time. If I plug in a -21% return for 2012 and then run the Computer portfolio (the only one that doesn't rely on 30y bonds), I'm getting Much worse than though. Mine and the Dalio portfolio are probably going to be doing a lot better given that the 30y bond was sparred from a lot of pain. I think they rallied a lot in 2012 But its interesting how "cash like" instruments got punished in Greece. Now there is one more risk to people that want to avoid risk at all costs and sit on cash like instruments. There is unexpected inflation (like in Brazil in the 70's and 80s), financial repression (US since the 08 crisis) and unfair bond reestructurings where the long end is sparred and the short-term get punished massively (Greece)
Here is some of my data source http://www.bankofgreece.gr/Pages/en...loieldimosiou/titloieldimosiou.aspx?Year=2012 If anyone notices a flaw, let me know
For the 30y im finding that in year end 2011 the 30y was at 32.45 (par 100) 14.85% yield at 2012 end it was at 32.92 (par 100) 11.18% yield The yield at march 2012 end on that bond was 16.26. The mix of bonds discounted at 16%, according to the paper was worth 22c of face value. That returned (with interest) 49.635% from march to year end 2012. Thats equivalent to 32.92 of old bond face value so that 32.45 (par 100) 14.85% yield turned into 32.92 (par 100) at 11.18% yield using the calculator to see the bond value difference im finding a -18.349% present value loss
Very tough to backtest this Greek debt market. I just noticed that the Central Bank data might be busted and might not be reliable. There are some years where bond prices go up and yet yields also go up (specially early in the sample). I think they were finding the closest bond to a 10y maturity and putting in their data, even if it was a different bond (like Transport autority bonds or some such), so its hard to know what was the P&L from an investor by the central bank data. I got these from their site But it just very odd early on prices kept rising and yields also rose. I dont know what is up with that The Damodaran formula that I use to derive the P&L of a bond investor from yields is not matching with a simple calculation derivered from bond prices+interest. Both in the beginning or the end of the sample
http://www.barrons.com/articles/whats-the-best-safe-haven-for-investors-1474651788 A potential addition to my 'Volatility hedge' basket. Although there are some questions about what is the proper way to implement such strategy (not sure the way Spitznagel suggests is the best one). It's also interesting how his finding that Gold is a good insurance asset over that data period also matches my own findings. The key, I believe, it not make this taleb type strategy the only 'volatility hedge' but to have it as part of an overall diversified basket plan. That way if it does poorly, if its badly implemented, if it is flawled, unlucky, etc. There are other strategies running at the same time that can provide protection Its the 'make it idiot proof' principle. If Hussman had followed the idiot proof principle he would still be relevant today
I plan to do some more research on this topic and try to think of a smart way to implement it so I can add to my basket approach. Its tough because ever since I cut down my daytrading hours I have been researching more but I keep finding more and more topics to research. I got to: -Read dozens of papers about risk parity to learn more tricks related to these portfolios -Catch up on the many different audiobooks I purchased but have yet to listen to -Find, collect and run portfolio tests on UK monthly data in the past 100 years or so -Improve my optimal portfolio using the UK data and then apply it to my Brazil data. -Finish my backtest on Greek markets -Then finish my mini-book about balanced portfolio investing in Brazil using the discoveries from the US/UK/Greece/Brazil data -Re-read classical works of finance/trading/investing and relearn important lessons -Read everything in finance/economics/statistics that Taleb says its shit, because odds are, it has some applications that are not shit and can be useful if the investor can think for himself -Read more papers from Jeremy Siegel and Cliff Asness. They are pretty good writers -Plus lots of other things
One issue with the Spitznagel backtest is that almost surely the strategy was a net money loser overall (as opposed to US bonds and gold where it produced a profit). So while buying OTM puts produces the best 'hedge effect', it comes with a cost. Most of the data that I have seen shows that consistently buying OTM options loses money even if you put a few black swans in there. So either there will have to be incorporated a 'timing' element to this OTM put buying or some kind of 'financing' scheme with the sale of ITM options
Brazilian stocks made a 5 year high today. CAPE still quite low and rates are going to be cut more what the market thinks. I'm still not selling any shares
http://www.zerohedge.com/news/2017-...g-3rd-highest-chance-black-swan-crash-history Right now seems to be a expensive time to do this short of tail hedging So perhaps one would apply a "contrarian" approach to OTM put buying? Buy when they don't want them, sell/or dont buy when they want them? It could be an idea