The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis (BUSINESS BOOKS)

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The past few decades have been too prosperous in Western countries. The book's authors believe that, sooner or later, people will have to pay for that with a painful long-term economic recession. They also predict that eventually, central banks will lose their ability to influence the situation. After that, the financial system will transform somehow. If you think easing and tightening at the same time sounds like a contradiction, sounds like a loss of control, I’m with you. Kevin Coldiron is a Lecturer in the Financial Engineering program at U.C. Berkeley’s Haas Business School. From 2002-2014 he was co-owner and co-CIO at Algert Coldiron Investors, a San Francisco-based quantitative hedge fund. Prior to that, Kevin spent 11 years in the UK where he founded the hedge fund business for Barclays Global Investors after serving as Head of European Research.

This relationship is difficult to show graphically, as there are over twenty-three thousand data points for each data series. Possibly overblown! Possibly very very very important! I need to read it again to determine the exact ratio.

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The authors do not make this distinction sufficiently clear, defining carry as a trade with ‘short exposure to volatility’. This is correct for short volatility trading, but not for FX carry where only volatility in the wrong direction is problematic. But perhaps I am being too pedantic. Higher yielding currencies are usually emerging markets. These get hurt when risk levels are elevated, whilst lower yielding currencies are normally ‘safe havens’ like the US and Japan. The financial crash in February-March does not need coronavirus to explain it. It was predictable based on an understanding of the carry regime. But unlike in previous carry crashes, extreme central bank (and government) action has seemed able to rescue the financial markets but this time not necessarily the economy. The carry regime tends to increase inequality and the much more extreme situation we find ourselves in now raises a question mark as to its sustainability. What comes next is uncertain but there are pointers that can provide strong clues to the bigger picture. Kevin Coldiron is a Lecturer in the Financial Engineering program at U.C. Berkeley’s Haas Business School.

At first glance an unhedged short volatility position has no effect on the market. But it is very likely that an unhedged trader has sold their options to a market maker, who will usually be delta hedged (unless they are young and callow). The market maker is long volatility, and hedges by selling as the market rises, and buying on dips. They will reduce the volatility of the market.

Because there exists an risk-of-ruin, and the manifestation of which on a large scale in unacceptable to the central bank: Jamie Lee works for investment guru and philanthropist Jeremy Grantham, focusing on environmental research and volatility trading. He previously worked as economist and analyst for asset management companies in Boston and London. Jamie holds a B.A. in Mathematics and English from Dartmouth College. The central thesis of the book is as follows. The financial authorities of developed countries artificially suppress volatility in financial markets. In the past few decades, selling volatility has been too profitable. The buyers of put option made significant profits in those rare periods when the bubbles collapsed. However, even despite it, buying volatility has been too unprofitable. Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy—and the meteoric rise of carry.

What is a Franken-Bull? It’s a term I came up for a market that has bearish fundamentals, but experiencing a bull run.The financial shelves are filled with books that explain how popular carry trading has become in recent years. But none has revealed just how significant a role it plays in the global economy - until now. He currently lives in Oakland, California with his wife Jody and their four children and has as a moderate-to-severe obsession with tennis. He began his career in quantitative finance in the early 1990’s with Barclays Global Investors in London. At BGI he became head of European research and later founded their European hedge fund business and co-managed the UK and European equity market neutral funds. Holding a short position in volatility, by contrast, produces steady profits at the expense of occasional large losses. In the event of higher volatility, those who provide insurance against such an increase have a high risk of going bankrupt—a risk that is amplified if, as seems most often to be the case, they are leveraged. Thus a rise in volatility has the potential to set off a vicious cycle: when volatility rises, the cost of insuring against both gamma and vega risks will likewise rise; as a result of this increased cost, the market will become less liquid, and the decline in liquidity is itself likely to enhance volatility.