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).