You can find the spreadsheets for this video and some additional materials here: drive.google.com/drive/folders/1sP40IW0p0w5IETCgo464uhDFfdyR6rh7 Please consider supporting NEDL on Patreon: www.patreon.com/NEDLeducation
Please keep in mind that NBER data have a lag that, historically, have been, at a minimum, 4 month late. The Feb 2020 recession was "official" for NBER on June 8th 2020. So use this valuable study to understand allocation but not for a real backtesting. Keep in mind the LAG! This means that YOU have to decide (or have a model that tells you) well in advance of NBER if you are in a recession or not and THEN use the appropriate allocation according to your studies. As always, a wonderful work from NEDL. Top man!
Hi Vlad, and happy you liked the video! The textbook definition is three consecutive quarters of negative GDP growth (which necessarily makes a definition of recession quite backward-looking which is not ideal for investing purposes). Some analysts look at yield curve slopes (if it slopes downwards, recession is more likely, however the accuracy of this method is disputed), or at recent unemployment and inflation figures (if both go down, it is a supply-driven expansion, if both go up, it is a supply-driven contraction, and if they move in the opposite directions, it is a demand-side contraction/expansion).
When we do portfolio rebalance how to include cash component in it. lets say i have 5 stocks in my portfolio, cash is the 6th component, i want to rebalance the stocks and increase or decrease cash component accordingly also never want to use up 100% cash need to maintain at least 5% cash always.. how to do this.
Hi, and thanks for the question! You can include cash as the sixth asset with zero expected return and zero risk (you do not need to include it when calculating returns and risks, just use the stock weights, while demanding the sum of all weights, including cash, to be 100%). As the value of cash is constant, you can simply treat it as a stock with a constant price of 1 :)
the alpha of the last 50 years (600 months) also goes down because indeed there are fewer recessions. From 1890 to today I count 25% of months in recession but in the last 50 years we are around 13.5%. So if being in a recession provides alpha "info", then having fewer recessions makes you invested like the market and your alpha just goes down.
Hi Riccardo, and thanks for excellent comments! You are indeed right - given recessions have become less common, strategies timing these are delivering lower alpha naturally. Same goes for the lag in recession reporting - I have tried a lag of three months in the video (which gives an alpha of 13 bps per month), and if you change it to four month as you suggest it drops further to 11 bps per month (remaining statistically significant though). I have quickly tested how much of a lag do you need to impose before alpha vanishes (ceases to be statistically significant), and it is twelve months (which is quite a long lag to identify a recession). Hope this helps!
Please reduce speed, you are moving too fast for me. Also try not to swallow your words, sometimes it is difficult to hear what you are saying. Otherwise a very useful series. Thank you.
What I usually do , is to set the video to 0.75 and is good, I dont think he has to change but maybe more emphasis when he is talking about the interpretaiton
You can find the spreadsheets for this video and some additional materials here: drive.google.com/drive/folders/1sP40IW0p0w5IETCgo464uhDFfdyR6rh7
Please consider supporting NEDL on Patreon: www.patreon.com/NEDLeducation
Please keep in mind that NBER data have a lag that, historically, have been, at a minimum, 4 month late. The Feb 2020 recession was "official" for NBER on June 8th 2020. So use this valuable study to understand allocation but not for a real backtesting. Keep in mind the LAG! This means that YOU have to decide (or have a model that tells you) well in advance of NBER if you are in a recession or not and THEN use the appropriate allocation according to your studies. As always, a wonderful work from NEDL. Top man!
Great explanation as usual ! :)
Can you provide the link to download the values of the Defensive sectors and Non-defensive sectors? I can't find where I can download it. Thanks
Great video as always. What other ways could we detect whether we are or not in a recession?
Hi Vlad, and happy you liked the video! The textbook definition is three consecutive quarters of negative GDP growth (which necessarily makes a definition of recession quite backward-looking which is not ideal for investing purposes). Some analysts look at yield curve slopes (if it slopes downwards, recession is more likely, however the accuracy of this method is disputed), or at recent unemployment and inflation figures (if both go down, it is a supply-driven expansion, if both go up, it is a supply-driven contraction, and if they move in the opposite directions, it is a demand-side contraction/expansion).
When we do portfolio rebalance how to include cash component in it. lets say i have 5 stocks in my portfolio, cash is the 6th component, i want to rebalance the stocks and increase or decrease cash component accordingly also never want to use up 100% cash need to maintain at least 5% cash always.. how to do this.
Hi, and thanks for the question! You can include cash as the sixth asset with zero expected return and zero risk (you do not need to include it when calculating returns and risks, just use the stock weights, while demanding the sum of all weights, including cash, to be 100%). As the value of cash is constant, you can simply treat it as a stock with a constant price of 1 :)
@@NEDLeducation Thank you.
the alpha of the last 50 years (600 months) also goes down because indeed there are fewer recessions. From 1890 to today I count 25% of months in recession but in the last 50 years we are around 13.5%. So if being in a recession provides alpha "info", then having fewer recessions makes you invested like the market and your alpha just goes down.
Hi Riccardo, and thanks for excellent comments! You are indeed right - given recessions have become less common, strategies timing these are delivering lower alpha naturally. Same goes for the lag in recession reporting - I have tried a lag of three months in the video (which gives an alpha of 13 bps per month), and if you change it to four month as you suggest it drops further to 11 bps per month (remaining statistically significant though). I have quickly tested how much of a lag do you need to impose before alpha vanishes (ceases to be statistically significant), and it is twelve months (which is quite a long lag to identify a recession). Hope this helps!
@@NEDLeducation just love your work. Superb
Please reduce speed, you are moving too fast for me. Also try not to swallow your words, sometimes it is difficult to hear what you are saying. Otherwise a very useful series. Thank you.
What I usually do , is to set the video to 0.75 and is good, I dont think he has to change but maybe more emphasis when he is talking about the interpretaiton