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Sunday, November 16, 2008

VOLATILITY

No one has missed the tremendous rise in volatility in september and even more in oktober: the VIX index thee-doubled in the value since the beginning of september. We saw intraday movements only normally seen in months. It is also the sudden change in volatility that has surprised many people.

Look at the VIX data at the yahoo website during the last 6 months and for a comparison a chart since 1990. It seems that all of a sudden the world has completely changed since oktober. In reality it hasnot.






(Data from Yahoo)

Quite a while ago I wrote an article about intrady movements on the German Future DAX in a magazine called Traders.

There I defined volatility as the difference between the daily Highs minus the daily Lows because this value being really of importance for daytraders as they feel this movement throughout the day.

The data were gathered and various statistical tests were performed with it. One of the aims was to see if the data would fit in some distribution. It was no surprise that these data did not fit in a normal ditribution. It is almost ridiculous now to think of normality data returns.

The best guess then was the General Extreme Value distribution (GEV). These kind of distributions are known from Extreme Value Theories, fairly complicated material and for more details I refer to my article.

Some of the conclussions drawn from the article were:
Importantly the intraday movements do not follow a normal distribution but exhibit a fat right tail and skewness to the right. The non normality of these intraday movements has consequences for risk analysis (.. as done in VaR calculations).

The observation of bigger intraday movements than could be expected when normally distributed has consequences for risk management. Fitting data in a Fisher-Tippett or GEV distribution and looking at the relevant cumulative distribution gives a much better insight in the possible intraday movements of the FDAX and thus in the risk you may expect, but also in the opportunities this gives.

This was a good thought and seems to be totally right (but not followed by the so called professionals).

11 Comments:

Blogger george h said...

What would be the number one risk when it comes to stock investing could it be volatility?

12:49 AM  
Blogger facebook fun said...

This comment has been removed by the author.

11:18 AM  
Blogger facebook fun said...

of course volatility is one risk.but a careful look has to be made.sometimes the volatility may remain stable,but it may also plunge.day trading is one option ,where you could make easy profits.when the stock rises,you would sell.you are provided with day trading secrets
which will help you to analyze easily and make handful profits..

11:20 AM  
Blogger Unknown said...

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9:25 AM  
Blogger JP said...

Good points on the intraday volatility.

Kind regards,
Jonathan
Partner of www.gambitrader.com

12:07 AM  
Blogger Rocker said...

great post, maybe we should compare it with the crisis index from this web
http://www.global-crisis.com.ar/with_FL/Html/downloads.php

6:43 AM  
Blogger The Daily E-mini Trader said...

Still around???? No???? any updates.....

Keith
thedailyeminitrader.com

1:59 AM  
Blogger Benjamin said...

Thanks for the information. Day Trading Stories

10:56 PM  
Anonymous Anonymous said...

Hi,
Seems like it’s a nice blog. So let us also add something useful in it. Trading in volatile market can be very fruitful also if we follow technical levels closely. It’s a common saying that stock market can change fortune in either way. But now the question is how to earn money from the Indian stock market.

Traders are advised to strictly follow technical analyses and investors can follow fundamental analysis. Many analysts say it’s not wise to follow technical and fundamental analysis together. But we say what the problem is if one does so? As more knowledge will add up things will not have any negative impact.
India Advisory Stock Research

9:00 AM  
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