Wednesday, May 08, 2019

More Asymmetry

A couple of days ago I posted about the asymmetry of market returns capture by the target portfolio. The portfolio captured less than 100% of the upside in the markets but almost none of the downside. The chart below, inspired by a recent paper from AQR, shows the Bitcoin trading model's daily returns compared to the absolute percentage change in the price of Bitcoin futures for that day:

The rising diagonal line are all the days when the model was properly aligned with market direction. The descending diagonal line are all the days where it was incorrectly aligned with market direction. The remaining cloud of points is where the model changed direction. Some of those days were winners and some very bad losers when the model ended up incorrectly with the market in both directions that day. For example, it was stopped out of a long position and entered a short and then the market rose for the rest of the day...

The fitted quadratic curve shows that for low absolute price changes up or down in the price of Bitcoin, the model tends to lose money. This is because of "whipsaw". There is a strong asymmetry in the response for large moves and so the fitted curve shows that the model captures increasingly more of the return the larger the move.

The results do conform to AQR's argument that returns to trend-following have been poor recently because markets haven't been moving enough.

1 comment:

CapitalStars07 said...

This is really very useful information. Thanks for sharing, keep writing.
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