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smk
Preferred Member
Cash: $ 37.05
Posts: 183
Joined: 12 Dec 2012
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quote:
Originally posted by coaster
"periods of high inflation", ya, but how long do those last? You have to look at the average over long periods of time. There will be short-terms periods of leading and short-term periods of lagging. Such is the nature of the beast. Over the long term it leads.
this is a common sense question, not a modeling one. sometimes I use models to explain it though. you are assuming periods of high inflation by definition must be short. is there some fundamental reason to guaranty that or does that just happen to be the recent history in the US. 
there are economies that experience hyperinflation. you can say it is short lived, but everything is wiped out by it. you might also find other countries with persistent inflation above 5%.
in your scenario if something like this happens you can get wiped out. what is the economic benefit for the risk? do you know?
for stories, I remember when people needed to come up with an index portfolio to match a mbs index, they would look at the variance-covariance matrix and simply optimize for the portfolio that minimized the tracking error. I never did that. I used a stratified sampling method when you took samples from all the coupon, maturity, and product ranges. take a few mbs from each box. there were reasons for their different behaviors even if it did not show up in the model, so you need to make sure you target the reasons for the behaviors. your approach here is like the first. mine is the second.
Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
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Tue Aug 20, 2013 4:03 pm |
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