Tag: quant

India VIX vs. SPX VIX

The VIX index is considered a gauge of fear in the markets. A high VIX entails high option implied volatility and occurs when traders bid up options. Given the recent market turbulence where pretty much all asset classes and equity markets across the board tanked, we wanted to check if VIX indices across markets had any relationship with each other.

VIX since 2009

The India VIX index was introduced only in 2009. Let’s start by plotting it vs. the S&P 500 (SPX) Vix to see if it passes a visual sniff test.

vix.historical

We can see at least five instances where India Vix popped without a corresponding move by SPX VIX.

Distribution

The problem with trying to nail down a relationship between the two indices is that, as one would expect, India VIX is way more dispersed than its SPX counterpart. Here’s the density plot.

india vix - spx vix density plot

India vs. spx vix density plot by year.

They might share the same suffix, but they are two completely different beasts.

Cross-correlation

The plots above look at VIX levels. Maybe we should check if the changes in VIX are related. Here’s the cross-correlation plot.

india vix and spx vix cross-correlation plot

India vix and spx vix cross correlation by year.

Conclusion

We cannot really use the two Vix indices to predict each other’s moves.

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Market-Cap Deciles, Part II

We had introduced the concept of dividing the universe of stocks by market-cap deciles a while ago (StockViz.) Here are some observations.

Returns

The last year has been spectacular for small- and mid-cap stocks.

From August-2014 to Now:
decile all

For 2015:
decile 2015

So far in 2016:
decile 2016-JAN
Note: Deciles go from 1 (micro-cap) to 10 (mega-cap)

In 2015:

  1. If you had blindly invested in an equal-weight portfolio of ~145 micro-cap stocks, you would have been up ~70%
  2. Every other decile out-performed the mega-caps (decile #1)
  3. Note how the standard-deviation of returns compress as you walk up the cap

Migrations

migrations 2015
Free-float market-cap is a volatile measure in itself – when you use that to classify stocks, you end up with quite a bit of movement between deciles. Something to keep in mind while using deciles for analysis.

Market breadth indicator

The mega-cap decile (decile #1) can be used as a crude market-timing indicator. If you track the number of stocks in the decile that went up vs. the number that went down, you end up with a proxy for breadth.

long-short-nifty

Even though technically it beat the buy-and-hold NIFTY 50, the indicator produces too many trades and it doesn’t offer a large enough margin of out-performance to be useful in live trading.

Next steps

We will continue to poke around and share what we find!

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Equity Returns at the Turn of the Month

The Turn of the Month Effect

A recent paper in the Financial Analysts Journal looks at the Turn of the Month effect on equities. Equity Returns at the Turn of the Month, John J. McConnell and Wei Xu:

The turn-of-the-month effect in U.S. equities is found to be so powerful in the 1926–2005 period that, on average, investors received no reward for bearing market risk except at turns of the month. The effect is not confined to small-capitalization or low-price stocks, to calendar year-ends or quarter ends, or to the United States: This study finds that it occurs in 31 of the 35 countries examined. Furthermore, it is not caused by month-end buying pressure as measured by trading volume or net flows to equity funds. This persistent peculiarity in returns remains a puzzle in search of an answer.

Does it apply to Indian markets?

The study skips over the Indian markets. So we did a quick test on the CNX 100 index to check if the effect holds. Here’s the cumulative return chart between a Buy-and-Hold CNX 100 strategy (B&H, black) and a Turn-of-the-Month CNX 100 strategy (TOM, red):

CNX100.TOM

Although the TOM strategy has lower-drawdowns, the B&H wins – both in terms of tax advantage and trading costs. The Turn-of-the-Month effect doesn’t seem to apply to Indian equities.

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Broadcast Dates on NSE

This is more of a “note to self” post. I was trying to do some earnings event analysis and got tripped by this. If you look at NSE’s quarterly earnings broadcast, the ‘broadcast date/time’ they provide lags the time at which earnings are actually announced.

If you take a look at DCBBANK, for example, this is what NSE says:

dcb broadcast

However, results were announced the previous day, during market hours:

dcb announce

So if you are looking to match up market action with announcements, then NSE’s broadcast time-stamp is no good.

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Mutual Fund Alpha Charts

Charting Alpha

Most mutual fund investors chase recent performance. However, experience shows that alpha, or out-performance, is rarely sustained in the fund universe. To visualize how alpha fluctuates across different time-periods, we extended the relative strength spread notion of stocks to mutual funds. By normalizing performance across multiple funds vs. a single benchmark, the CNX 500 index, we can get a sense for how stable the alpha is.

Exhibits

Have a look at the RS-Spread chart of the HDFC Growth Fund:
hdfc.growth.mf.relstrength

Notice how 1-year alpha was below zero between Oct’2012 and May’2014 and is now back below zero again. This should indicate that whatever strategy the fund is employing is not that great in generating sustainable alpha. Now compare that to the Birla Sun Life Frontline Equity Fund:
birla.frontline.mf.relstrength

Notice how the fund has managed to outperform over the last 5-years. Here’s the MNC fund’s RS-Spread chart:

Birla.MNC.mf.relstrength

The FundCompare Tool

We update these charts daily for more than 100 funds. You can access them through our FundCompare tool. If you have any questions, give us a call or Whatsapp us!

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