Tony Morris, Global Head of Quantitative Strategies at Nomura International, has spent 25 plus years studying complex market pricing relationships across asset classes, with a focus on derivatives. Our conversation explores some of the factors that drive asset price outcomes, first, considering the vol risk premium. Observing the consistent shortfall of realized versus implied vol in the equity market, Tony details a similar circumstance in credit where realized defaults are lower than implied by spreads. He suggests that the existence of both the equity VRP and the credit risk premium are tied to fact that both have beta to the SPX, which in turn enjoys its own risk premium.

Our conversation shifts to the work that Tony and his team are doing within the larger Quantitative Investment Strategies, or QIS, business at Nomura. We touch briefly on the history of QIS, a business motivated by end user interest in systematic strategies that require substantial market access, modelling and operational infrastructure. At its core, QIS enables the outsourcing of these critical components to a dealer who can package complex exposures into a neatly delivered contract.

We talk broadly about the set of products that comprise the taxonomy of QIS. Here, Tony cautions that in constructing a portfolio, it’s important to carefully consider the way in which strategies interact, with attention to hidden co-movement.  We spend the last part of our discussion on long-dated swaption straddles on long dated US rates, a topic Tony and team have done a deep dive on. Their work suggests that an overlay of 20y20y – that is 20 year swaptions on 20 year swaps – has very favorable correlation, carry and convexity characteristics. Along the way in sharing the results, Tony debunks a few commonly held assertions around the factors driving the returns.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Tony Morris.