In my last post, I mentioned two forecasts from my model on stocks going into earnings, and discussed the implications of a model's performance during this critical time period.
GS and JNJ earnings have been reported, and our model's insight was correct in both cases. In the case of JNJ, analysts' predictions gave an average of $1.15 per share, with a low of $1.10 and a high of $1.17. In reality, JNJ reported $1.23 per share, despite a minor slip in revenue, and raised their EPS forecasts for year-end. As for GS, America's perennial investment bank, analysts averaged a forecast of $2.29, with a low of $1.81 and a high of $3.00. They came in at $2.98, just shy of the maximum forecast.
It is 9:15 right now and both stocks are down in pre-market trading, so only time will tell how the market will react. What is interesting, though, is the fact that our model's predictions were in line with true changes in the company's fair value. Whether the perceived value will change with it, of course, remains to be seen.
Hey. Unrelated to this post. Just saw that someone on the arXiv is claiming to predict the stock market with Twitter and I anted your opinion:
ReplyDeletehttp://arxiv.org/abs/1010.3003
-Lors_Soren from the quantfinance subreddit
Another unrelated question. I'm on a little bit of a brain-storm about combining path-independent bets with path-dependent bets. Say you're a bank and you want to offer someone insurance against margin calls -- like they "know" the price will end up where they want it to but they want insurance against intermediate moves.
ReplyDeleteEssentially American - European insurance.
What would you charge? Do you think people currently mis-price it?
And -- given the enormous possibilities of volatility during the interim -- do you think there are vol arb's you could do on higher moments, cross-security moments, or piecemeal time periods?
Couldn't you do this with a portfolio of Asian and European options? That would allow you to reduce the problem nicely and use existing models for pricing the security.
ReplyDeleteThat said, yes I do believe most options (and especially Asian options and other exotics) are frequently mispriced by the market. The silly thing about "vol arb" is that vol in the sense of implied vol is really a fictitious concept, invented simply to fit model to data. So vol arb in your context is saying that you believe the average discounted payoff based on the path dependency is greater than the price of the option.
As for the last bit -- well, yes, I'd recommend looking into those things ;)