Dragos Nedelea

Most cited paper "Equity Portfolio Diversification" by William N. Goetzmann and Alok Kumar in Review of Finance, Volume 12, Issue 3, 2008, Pages 433–463, https://lnkd.in/dD64A-s Published: 28 March 2008 Abstract This study shows that U.S. individual investors hold under-diversified portfolios, where the level of under-diversification is greater among younger, low-income, less-educated, and less-sophisticated investors. The level of under-diversification is also correlated with investment choices that are consistent with over-confidence, trend-following behavior, and local bias. Furthermore, investors who over-weight stocks with higher volatility and higher skewness are less diversified. In contrast, there is little evidence that portfolio size or transaction costs constrains diversification. Under-diversification is costly to most investors, but a small subset of investors under-diversify because of superior information. JEL G11 - Portfolio Choice; Investment DecisionsG12 - Asset Pricing; Trading volume; Bond Interest Rates Oxford University Press OUP Academic Yale School of Management Texas McCombs School of Business European Finance Association

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As one would expect, SPX Skew (1m 25d) should be elevated with the upcoming US elections. Below we are looking at HS<go> and the SPX vs the SX5E Skew (1m 25d). The upper chart shows that overall Skew was coming off for both after Covid. (blue box) But it also shows, that Skew has been rising since end of 23 for the SPX, and end of Feb 24 for the SX5E. The chart in the middle shows that SPX Skew used to be over the SX5E up to the end of 21, and only since about July this year turned more expensive relative to the SX5E again. Correlation between the two is at its highest since end of 21 too. You can create your own Skew indices using CIX<go>

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Convexity and FRTB Models in finance require inputs, usually prices or parameters, to generate outputs which are often the prices of more complex financial instruments. The relationship between input values (horizontal axis) and output values (vertical axis), when plotted on a chart, will almost always exhibit curvature. Convex functions, such as the x-squared fn in the diagram below, are a specific category of curves. They have the property that they always lie above tangent lines, e.g., the red line in the diagram, drawn to them. This accretive nature of convexity is formalized in a theory known as Jensen’s inequality. It states the that avg of the outputs generated by a convex fn is >= the fn’s output when the avg input value is used. The x-squared fn’s inputs in the diagram are 1, 2, 3, 4. The avg of those inputs is 2.5 and this number squared is 6.25. The fn’s outputs, however, are 1, 4, 9, and 16. And the avg of these outputs is 7.5. The outputs of the convex fn x-squared, therefore, have a greater avg value than transformed avg x-axis input value. Two of the most common functions in QF, the call option fn and the bond yield-price fn, are also convex. Unlike x-squared, the QF functions contain random terms. The option fn transforms a random underlying price into a random price of an option written on it. The yield-price function transforms a random bond yield into a random bond price. In both cases, their randomness is the characteristic that enables the convexity to add value to the output prices. The pay-off function of a call option is convex because the holder benefits from price increases without facing similar losses when prices fall. Equivalently, bond prices are convex wrt changes in interest rates or yields because bond prices increase more when rates fall than they fall when rates rise. Yield-price convexity, therefore, offers some protection to bond holders in volatile interest rate environments. The more convexity in the relationship the more bond holders are protected. The tangent line to the convex curve captures the change in the price of the output instruments for a small change in interest rates. This rate of change is known as IR delta for an option or duration for a bond. The convexity is referred to as gamma for the option and just convexity for the bond. The option has an additional exposure, vega, to the volatility of rates. Under FRTB-SA, market risk capital is calculated by shocking rates by specified amounts and applying them to these risk sensitivities. Convexity is is due to the asymmetry of the valuation impact of the difference btw an upward and a downward shock of a rate. In FRTB IMA banks calculate their own rate shocks by simulating expected rate movements. Using the full reval approach allowed under IMA, changes to all the instrument’s risk factors are done in a single run. The delta, duration, convexity, gamma, vega and theta as well as the cross effects on each other are calculated in parallel.

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The Turkish central bank spent 3.0% of its reserves in one week. After a prolonged period of carry inflow funded reserve builds, the CBRT drew down USD2.8bn of its reserve pile in the week ending 26 July. My current view is that the CBRT has been funding major fx interventions (to maintain a ceiling on the USDTRY at 33.0, now 33.1) with carry inflows - which is a recipe for a particularly aggressive unwind: https://lnkd.in/ewADcvZ2 Today’s reserve print is further evidence of this: yen funded carry began unwinding in early July and this looks to be weighing on TRY inflows. Anecodal evidence (eye balling the USDTRY chart) suggests the CBRT is intervening a lot. The weekly outflow is also the right magnitude for my estimate of how expensive defending the CBRT’s peg should be (around USD7bn a month, topside USD16bn). The stock of external debt liabilities (carry assets) accumulated over the last 12 months is USD27.7bn. This is teeing up for a nasty TRY sell off - 35 could be in sight for USDTRY.

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STADA has announced new bonds to partially refinance its Term Loan B1 and 7.5% 2026 bonds, improving its debt structure and reducing near-term maturities. The issuance will be in two tranches: €500mm 02/2030 NC1.5 and €500mm 6NC1. I had a look to the presentation and It looks pretty good to me how the company has performed over the last few years. STADA has shown robust growth since 2017, with 14% CAGR in revenue and 20% in adjusted EBITDA, though growth slowed a bit in H1 2024 to +9% in revenue and +14% in EBITDA. Their leverage also improved, going from 7.5x in 2021 to 5.96x EBITDA in 2024. Product Diversification looks solid: - Consumer Healthcare (39% of sales): Lower margins, but resilient in non-regulated markets. - Generics (41% of sales): Driven by patent expirations. - Specialties/Biosimilars (20% of sales): Fastest-growing segment, +14% in H1 2024, with high margins driving EBITDA. Now... let's talk about the IPT . Here’s a look at some Comparables: - Grünenthal 6.75% 2030 (BB-): Trading at 107.25%, with a 5.31% YTM. - Rosini 6.75% 2029 (B+): Trading at 105.30%, with a 5.64% YTM. - Stada 7 02/21/30 (B+): Trading at 5.29% YTW (01/2028) and 5.92% YTM. Given these peers (including Grifols if needed), all trading below 6%, I’d expect the IPT to land in the 6%-6.25% range, with the FRN at 3m€+325-375bps. But... what IPT would I love to see? Over 7% on the fixed coupon and 3m€+400-425bps on the FRN, given current geopolitical tensions. Widening credit spreads are already a thing! 😅 And what will I probably see? A print at or even below 6% on the fixed coupon and 3m€+325bps on the FRN. That would be fair in terms of relative value, but hey, I’m allowed to dream, right?

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BNY Cautions Against Excessive Optimism in Turkish Market Regional conflict could shake Turkey’s economic stability: BNY Global investors have touted attractive lira and bond trade By Tania Chen (Bloomberg) -- BNY is warning that the influx of foreign capital into #Turkish assets may be overdone, with investors likely ignoring pitfalls that could prompt a reversal. Overseas investors have poured billions of dollars into Turkish assets this year, many banking on the #currency appreciating. However, sky-high borrowing costs and geopolitical tensions pose substantial threats to this crowded currency trade, according to Robert Savage, the bank’s head of markets and strategy. “I’m not sure that it can sustain 50% interest rates,” Savage said. “People are long #bonds, they’re long #equities and they’re long the currency. It’s a trifecta.” Bank of America strategists have calculated that positioning in Turkish lira forwards could now exceed $20 billion. Deutsche Bank, which called Turkey the “trade of 2024”, and Pictet Asset Management are among those bullish on Turkish debt and currency. Foreign holdings of local debt have climbed to more than $12 billion from less than $1 billion a year ago, according to data compiled by Bloomberg. State-run banks have helped to steady lira’s depreciation to below the monthly inflation rate, allowing the currency to appreciate more than 11% in real terms this year.

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Global Week Ahead – Human Error The three prime market risks over the #weekahead will be the outcome of the second round French legislative elections on Sunday, US CPI on Thursday, and the start of the US bank earnings season on Friday. Four regional central banks will weigh in with decisions and relatively light global macro reports will focus upon inflation gauges elsewhere. Chair Powell’s testimony will be sandwiched in between the week’s key developments. There is probably more upside than downside risk to US core CPI. Usually when core services inflation collapses as it did in May, the next month vaults back upward with the exception of the pandemic’s earliest days. Wages are the biggest component of core services inflation and they continue to rise at a fairly aggressive pace. Add in probably sticky shelter inflation through primary rent and OER and nearly 60% of the CPI basket could be on the warmer side. I also offer an outsider’s view on why markets have reason to fear the National Rally in France’s elections. Markets have calmed down somewhat because of the ‘Republican front’ strategic tactics of the other parties in an attempt to thwart National Rally’s rise, but performing better than projected - and especially if it achieves an absolute majority - could be quite damaging to risk appetite to start the week. Key topics: - US core CPI may reaccelerate - French election could impact risk appetite to start the week… - …as French parties circle the wagons on Le Pen - US bank earnings season commences - Powell testimony will be stale on arrival - CPI: China, India, Mexico, Chile, Colombia, Brazil - RBNZ expected to remain hawkish - BoK may sound more open to nearer term easing - Bank Negara likely to remain on hold - BCRP has a solid case to extend its pause

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This is definitely a GREAT reason to look forward to in 2025 Following market leader ICE, also Eurex has announced plans to introduce exchange-traded future contracts on EU bonds Deep and liquid bond future markets are not only a biproduct of deep and liquid sovereign bond markets, but also help to reinforce depth and price efficiency📈. And ICMA - International Capital Market Association praises futures for being a highly efficient off-balance sheet hedge for sovereign bond exposures Currently, there exist future contracts on European sovereign bonds from France, Italy, Spain, UK und Germany as the most liquid reference. Adding EU bonds with annual issuance of EUR 150bn+ will recognise the stronger relevance of 🇪🇺European funding since the pandemic and Russia’s invasion of Ukraine. Including also ESM - European Stability Mechanism and European Investment Bank (EIB), we are talking about an asset base of EUR 1tn with an additional unused capacity of EUR 1tn Certainly, Rome was not built in a day. That is why Eurex’ move marks an important building block for a strong European capital market infrastructure in support of Europe’s competitiveness ➡️ LBBW is a proud supporter of the Primary Dealer Network of the European Commission and delighted to discuss this topic more broadly in our recent roundtable with OMFIF going live soon Clive Horwood Burhan Khadbai Kalin Anev Janse Siegfried Ruhl Aness Meski Daniel Wrobel Thilo Rossberg Jan-Henrik Sandvik Jonas Jung Florian Rathgeber Lea-Marie Reich EMF-ECBC (European Mortgage Federation - European Covered Bond Council)

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….there is no "general accounting standard for AUM" and that its "definitions and reporting are in line with peer practice."… Totally agreee that it this peer industry practice. “Asset management” is too generic a term…. https://lnkd.in/gNpmPwhY

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BRL is among few EMFX underperformers today – > We are still waiting for the spending cuts plan > Inflation expectations continue to worsen and move away from the target > Current account is not a problem per se (2.23% of GDP and almost fully financed by FDI), but the dynamics signals that the economy is running hot

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Great literature review on inflation-linked products by Jarrow and Yildirim. Covers bonds, derivatives, pricing models, and empirical findings. Link (open access): https://lnkd.in/df5Pm5BB

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Log-Normal Stochastic Volatility Model with Quadratic Drift by Artur Sepp & Parviz Rakhmonov. Read the full articles at https://lnkd.in/gYsqmCtx. In this paper, the authors introduce the log-normal stochastic volatility (SV) model with a quadratic drift to allow arbitrage-free valuation of options on assets under money-market account and inverse martingale measures. They show that the proposed volatility process has a unique strong solution, despite non-Lipschitz quadratic drift, and we establish the corresponding Feynman–Kac partial differential equation (PDE) for computation of conditional expectations under this SV model. #bitcoin #ethereum #nonaffinemodels #momentgeneratingfunction #cryptocurrencyderivatives #quadraticvariance #IJTAF International Journal of Theoretical and Applied Finance

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Goldman Recommends Dec. 2024/Dec. 2025 Euribor flattener Supported by incremental domestic data and possible US spillovers, given the long wait until definitive data on a September cut; current rate-cut pricing suggests yields will struggle to rise from current levels, while the hawkish formal guidance lowers the bar for upcoming ECB speak to rebalance the debate a little more dovishly; bank’s economists continue to forecast a quarterly pace of rate cuts. Traded 27k lots on Friday #markets #tradeidea #euribor #futures #options

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Nice piece by Joachim Inkmann on thinking through the economics of optimisation over portfolio choice via the Journal of Empirical Finance. Interesting for anyone thinking about the economics of constructing - managing portfolio choice decisions over large groups of heterogeneous individual investors. #finance #portfolioconstruction #assetallocation.

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Since vol is back again - one chart and quite a bit of data visualized if this helped. First chart shows the SX5E. Second one are its 3m atm implied vols. Third chart is 3m 25d Skew. Fourth one is a 3m vs. 12m atm termstructure comparison. The bottom chart shows 10d, 30d and 60d realized vol. Additionally all indices with Bollinger Bands for context.

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Key Takeaways from Fitch Ratings' ABS sector rating revision to Neutral: - Default rates holding up really well especially driven by better-than-expected non-prime sector - There has only been a mild deterioration in delinquency rates especially in German Auto - Significant performance worsening seems unlikely - UK credit card sector default rates have been revised down along with European Auto - Expect softening in the labor market both in the UK and Germany (less so in France, Italy and Spain) but assume a broadly flat unemployment rate in Europe - Expect further interest rate cuts across the board - Main topics going into 2025: a) Residual value for used cars has been declining across Europe (UK down 15% from peak April 2023) but still above historical norms b) improving recovery rates are not expect to continue c) battery electric vehicles residual values have been declined more rapidly than conventional vehicles as the primary market is fueled by tax incentives but the consumer secondary market is not deep enough yet d) non-prime borrowers performance has seen limited decline thanks to AI and more sophisticated underwriting models driven by Open Banking and leading to better default rate predictability; many of those borrowers are being pushed out towards BNPL #finance #lending #consumerlending #abs #bnpl #europe #rating

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Who better to comment on European credit than The European Credit Rating Agency Read our latest thoughts on European sovereign risk below

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I am pleased to announce the availability of my second joint paper with Fabio Mercurio and Alexander Sokol on SSRN (https://lnkd.in/gVk6WZMS). The paper, titled "Machine Learning for Interest Rates: Using Autoencoders for the Risk-Neutral Modeling of Yield Curves," continues our research on integrating empirical information about yield curve evolution into risk-neutral term structure modeling using an autoencoder trained on historical data. This paper is a significantly improved version of "Autoencoder-Based Risk-Neutral Model for Interest Rates," which can be downloaded here: https://lnkd.in/gRqBpshk. In addition to enhancing the notation, the flow of exposition, and correcting some typos, we introduce critical new results, including an explicit and constructive methodology for creating risk-neutral models that align with historical rate observations and their joint evolution. If you read our previous paper, I strongly encourage you to explore the new one to understand how the general modeling framework introduced earlier can be leveraged to construct a risk-neutral model consistent with empirical observations. Specifically, we demonstrate that the concept of the generating manifold, introduced in our prior work, simplifies the model equations considerably, making our modeling approach very practical. Notably, by employing the generating manifold-based system of coordinates, we can eliminate the implied-forward component in the Musiela version of the Heath-Jarrow-Morton (HJM) framework, reverting it to the canonical HJM equation. We conclude the paper by showcasing numerical results based on historical market swap data for multiple currencies, visualizing graphically some of our key concepts.

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