DIVERSIFICATION
Figure 4: Momentum Investing
period January April 2010 ... which ended in tears in May 2010. The coming weeks will tell if this is the beginning of the downward phase of the cycle or only a temporary break in the boom.
All Commodities Are Equal ... But Some More Than Others We have so far examined the diversification
Momentum investing on commodities and equities and
commodity currencies (Australian dollar, New Zealand dollar, Canadian dollar). The trend score represents the proportion of trending systems going long or short out of 50 trend following systems (breakout, Bollinger windows, regression of moving
averages on time ...). A score of 1 (resp. -1) means that all the systems are long (resp. short).
Source: Riskelia
bubble on/bubble off alternator: in periods of risk appetite, positive momentums develop simultaneously on all asset classes, bubbles expand up to a point where some worries on euro zone banks’ financial health or some rumours on a possible tightening of Chinese monetary policy resurface. Bubbles then pop and start again once investors recover their risk appetite.
The Irish debt crisis has had, so far, a limited impact on assets outside Europe
Two such cycles have been
observed since May 2009 (where the trends of risky assets get back to zero): a first cycle stretches from May 2009 to July 2010, with the succession of a boom up to May 2010 and a deleveraging episode in May-June 2010, triggered by Spanish debt issues and the ensuing surge in banks’ financing costs. The second cycle boom period starting in the summer 2010 has taken a halt following interest rate increases by China provoking a large unwinding of positions. The Irish debt crisis has had, so far, a limited impact on assets outside Europe, a replay of the “bear euro/bull commodities” story of the
12 December 2010
properties as an asset class. It is worth investigating now the differences in the diversification behaviour of agricultural, metal and energy commodities. Commodities have undergone the same process of integration as global financial markets. During the period 2002-2006, which paves the way to the financialization of commodity markets, commodities are – without surprise – correlated within sectors but not across sectors. During the
Figure 5: Commodities Diversification
Average responses of different commodities sectors to the increases in risk aversion. The responses are calculated as the average asset returns on the weeks when risk aversion increases by more than a certain threshold (defined as the 90% quantile of risk aversion weekly variations). They are expressed in numbers of standard deviations. The first period ends Dec 2005, the second in Jul 2008.
Average responses of different commodities sectors to the large decreases in global risky assets. The responses are calculated as the average asset returns on the weeks when the average return of risky assets (average of the returns of commodities, emerging/commodities currencies against dollar, G10/emerging equities) is less than a certain threshold (defined as the 10% quantile of risky asset variations).
They are expressed in numbers of standard deviations. The first period ends Dec 2005, the second in Jul 2008.
Source: Riskelia
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