Jun

5

I once asked of the Chair, is it really worth it to trade markets not based in the United States? We decided that it was an 'interesting' question.

Taking this further it is of much interest to calculate the relative stability of markets. 'Stability' can be measured in many ways and I leave it to the reader (if there are any) to think about this point further.

For example:

1. Are US T - notes more stable than their international peers?

2. Is the S&P 500 more stable than its international peers?

3. Does relative stability explain why the regularities extant in U.S. markets are often massively more persistent than those for similar markets 'overseas'?

There are some interesting things to look at if one believes that the U.S. markets are at the beginning of the chain that moves other markets.

Clearly the more 'stable' market and the market at the beginning of the chain changes from time to time but my supposition is that it takes some great measure of 'statistical crisis'– for lack of a better term– to upset the U.S. market's hegemony even temporarily.

Bill Rafter writes: 

Presumably stability is the opposite of volatility, but there are a lot of ways to count volatility. And of course there is the question of "over which period?" I'm only guessing of course, but I'll bet that John B would define stability as staying within N standard deviations of a moving mean. And that also begs the question as to the period considered. Should the period be static or floating?

Ideally markets that are more stable would attract more portfolio holdings. That is, there would be a stability premium, or alternatively a cost of volatility. If there were two assets priced at $10 and you knew (don't ask how) they would be priced a $20 at a given point in the future, which do you buy for the portfolio? Obviously the more stable of the two since you may have the need to liquidate before the end of the period. In theory the more volatile one would be discounted vis-à-vis the more stable one. With stocks the end certainty is less defined than with bonds.

The original question implied that the investor/trader was looking to be long country markets that were more stable.

Let's suppose that you believe the country ETFs represent their respective markets. Then you could rank those ETFs by inverted volatility. We have done that after first ranking them by other means. We then would have say 10 ETFs that we would like to own, and make a final selection of a few according to inverted volatility. Alternatively it also makes good sense to buy the entire 10, but with different percentages of your equity.

Does that work? Yes, it is more profitable than holding SPY, but not exciting, such that we don't charge for it. We always include SPY in such rankings, as a tracer bullet. The really interesting thing is that SPY never rises to the top of the daily rankings.

We also have the problem of "over which period". One consideration would be to rank all the country ETFs according to the same period, as though China and the U.S. should be compared by the same time standard. That would seem correct if the account owner had a specific time need. Another consideration would be to let each country ETF dictate the period for comparison. But then you might have the input time for Australia being ranked over two years, with SPY only ranked over two months. That would seem correct if the investor was more of a speculator.


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