20160914-法国巴黎银行-Introducing_MarFA_BNP_Paribas_Market_Factor_Analysis_14页_1mb

BNP Paribas Market Factor Analysis (MarFA™) Summary

Core Content

BNP Paribas has introduced MarFA™ (Market Factor Analysis), a new cross-asset model that identifies correlations between assets and the main market and macroeconomic factors driving them. The model is used for quantitative input into their cross-asset strategy and provides two types of trading signals: MarFA™ Trading (short-term signals lasting 1-2 weeks) and MarFA™ Macro (longer-term signals lasting 1-2 months).

The framework utilizes Principal Component Analysis (PCA) to identify three main market factors and three macroeconomic factors. It monitors the relationships between 75 assets across equities, fixed income, credit, FX, and commodities.

Main Cross-Asset Correlations

• The 1st Market Factor explains 80%-100% of the variation in equity and credit indices, indicating a high degree of correlation between these asset classes.
• The 2nd Market Factor is primarily associated with US 10y real yields, influencing many fixed income assets and gold.
• The 3rd Market Factor is related to USD performance and xccy funding, affecting exchange rates.

Market and Macro Drivers

• The 1st Market Factor is currently driven by low implied volatilities in equities and FX, along with negative US real yields.
• The 2nd Market Factor is influenced by longer-term real yields.
• The 3rd Market Factor reflects USD performance and xccy basis.
• The 1st Macro Factor is the decline in long-term inflation expectations.
• The 2nd and 3rd Macro Factors are linked to economic growth indicators such as data surprises, economic surveys, and PMIs.

Trading Signals

• MarFA™ Trading indicates that:
  • Curves in Japan, France, and Canada have steepened too far.
  • High yield credit spreads in the eurozone and UK, as well as EM credit spreads and Australian equities, appear too low.
• MarFA™ Macro indicates that:
  • Chinese equities are overvalued.
  • Mexican equities are undervalued.
  • 10y French and Canadian bonds are too low.
  • Australian and Norwegian equities are undervalued.
  • 2s10s curves in France, Germany, and Japan appear too steep.

Fair Value Calculations

• Fair values are calculated based on the three most significant market and macroeconomic factors.
• Assets that deviate from their fair values by 1-2 standard deviations are likely to revert, and this deviation is used to generate trading signals.

Backtesting Results

• The MarFA™ Trading strategy has a Sharpe ratio of 2.6 and a hit ratio above 50%.
• The MarFA™ Macro strategy has a Sharpe ratio of 0.9.
• The average trade duration is 1-2 weeks for MarFA™ Trading and 1-2 months for MarFA™ Macro.
• The strategy has historically performed best for equities and fixed income.

Asset Class Performance

• Equities: Sharpe ratio of 1.6 for MarFA™ Trading, 0.8 for MarFA™ Macro.
• Fixed Income: Sharpe ratio of 2.1 for MarFA™ Trading, 0.7 for MarFA™ Macro.
• Credit: Sharpe ratio of 0.65 for MarFA™ Trading, -0.8 for MarFA™ Macro.
• FX: Sharpe ratio of 0.5 for MarFA™ Trading, 0.0 for MarFA™ Macro.
• Commodities: Sharpe ratio of 0.2 for MarFA™ Trading, 0.1 for MarFA™ Macro.

Key Insights

• The model identifies market and macroeconomic factors that have been driving asset prices.
• It provides a forward-looking and predictive component by analyzing deviations from fair values.
• The predictive power of the model is supported by backtesting results from 2010 to 2016.
• Assets that are overvalued or undervalued can be profitably traded based on the model's signals.
• The framework allows for the quantitative tracking of which variables are important over time.

Conclusion

MarFA™ is a robust framework that identifies and monitors the correlations between asset classes and the factors driving them. It provides trading signals based on both short-term and long-term fair value deviations, offering insights into market and macroeconomic trends. The model has demonstrated predictive power through backtesting, suggesting its effectiveness in generating profitable trades across various asset classes.