As one of the most famous economist John Maynard Keynes putted it all greatly in the term "animal spirits". âEven apart from the instability due to speculation, ...
Fight or fight response in the Capital Markets
Before start REMARK : This work is unfinished .It will contain a lot of grammar errors and it will be scarce.Final version will be available after experiment phase get finished. Document is uploaded because of the time-sensitive nature of the work. Today's capital markets ,supported by rapid developments in technology and general increase in information exchange,managed to construct a large high-speed global network. Interchanging Along with this evolution,they become more complex. Most people would agree irrational and confusing1 , especially in the short - run. But as much complex they became,they undisputedly remains subjective outcome of human frame of valuation and reasoning. Hereof , in the most phases we can with certain confidence sense the specific psychological implications on markets. Fear is the one of the basic survival human instincts and skill that we should thank for being alive today. As one of the most famous economist John Maynard Keynes putted it all greatly in the term "animal spirits". “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”2 Recently there was a lot of progress in the field of psychology,neuroscience,sociology and economics in general regarding the question of human behaviour caused by fear. MIT professor of Finance Andrew Lo did a great job writing about this in his papers 3and holding a great lessons on the University of Oxford, so I won’t get into details and deprive you from enjoying the great lessons.
1
Markets can remain irrational for longer than you can remain solvent. J.Maynard Keynes
2
The General Theory of Employment, Interest and Money
3
Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspectiv
My idea and research paper will be more focused on testing fear effect in the real-time experiment.And yes you read it correctly “experiment”, the word not that often in the field of economics. The upcoming “Brexit” vote (23 June) would be ideal to monitor market behave. Of course the job would be a lot easier by simply tracking CBOE Volatility Index (so called FEAR INDEX) but because of the nature of the event that would be less usefull. Because VIX is focused on US markets primarily and we would be able just to capture the spillover effects.However VIX is today up 15% since the markets opened. Which is the level ,last time seen four months ago , back in February.
So I decided to use another approach and create conservative “safe asset portfolio”.Test and track its performance in the next 10 days until Brexit vote finish. Porftolio will contatin government bonds,gold , stock indices and currencies. Stock indices will only in short (sell) position , because of the nature of the stock market. Portfolio structure and capital allocation :
40%- government bonds (UK GILTS,US T-NOTES,Swedish gvt bonds , Norwegian gvt4. Bonds, all bonds with 10 yr maturity) - BUY 25% - GOLD - BUY 25%- stock indices (CAC,FTSE,DAX,FTSE MIB) - SELL 10% - CURRENCIES – JAPANESE YEN – BUY5
Safe asset portfolio
BONDS GOLD STOCK INDEX FOREX (JPY)
4
Generally speaking some other bonds would be more welcome ,as German bonds, but negative interest rates in Europe led to really low yields on these bonds and the vast majority of European bonds. 5 I would put more % on the currencies ,especially in JPY long but for two days it’s is upcoming BOJ meeting so currency will be in the short run more volatile
TEST TIME : 13.06.2016 – 23.06.2016
