Japan, Volatility Clusters and Baklava

Chidem Kurdas

I got the term “volatility clustering” from George Tzanetatos, with whom I recently discussed global risks for an article in Opalesque Futures Intelligence, a publication I edit.   That was before the earthquake and related disasters in Japan.

Mr. Tzanetatos has been prescient about the Greek economy and bearish overall—which in 2010 led to a loss for Global Titan, the fund he manages. His broad view is that we’re on the downside of a Kontratieff cycle. Controversial though the idea is, Kontratieff  cycles – very long-term economic movements usually related to waves of technology – are intriguing.

George points out that risks and returns tend to cluster. Sometimes major events and various sources of turbulence cluster. Risks will continue to cluster on the downside, he predicts.

Viewing the frightening developments at the Japanese nuclear power reactors, he asks  why we humans bring ourselves to the brink every time we progress technologically. He argues that models of human behavior in the market and life are deficient because the unknown unknowns are greater at times than the known factors included in the model, but as knowledge advances we think we rationally understand outcomes that are in fact beyond our models.

Occasionally the unknowns cause inexplicable potential  clustering of risks—-nuclear, political, economic, financial, and whatnot. Then what started as  technological  solutions to problems like the need to generate more energy turn into disasters. George says it is the possibility of global risk clustering that makes each crisis potentially apocalyptic.

To highlight a minor implication of this reasoning, global macro-type investments can protect against clusters by moving nimbly across markets and between long and short positions.

Beyond investment concerns, George argues for the importance of international cooperation and finding common ground. So happens, he and I exemplify this—we both love baklava, notwithstanding the bitter conflict between our ancestors, his Greek and mine Turkish.

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One Response to “Japan, Volatility Clusters and Baklava”

  1. Can Political Risk Be Hedged? « HedgeFundSmarts Says:

    […] Mr. Tzanetatos manages Global Titan, a futures trading fund with a macro approach to protecting against tail risks. One of his concepts is volatility clustering, which I wrote about earlier this year. […]

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