Sunday, December 04, 2005

Does Volatility Matter?

Here I replicated yesterday's study, but used six-day volatility (the sum of each day's range, with range stated as a % of index value) instead of breadth as the predictor variable. Volatility for the most recent six-day period has been below average (4.51 vs. 5.77).

When volatility during a flat six day period (N = 26) has been below 5.0 (N = 10), the market has been up 8 times, down 2 for a gain over the next six days of .80%. When the volatility has been above 5.0 (N=16), the market has been up 8 times, down 8 for an average loss of -.38%. Once again, this is a modest positive for the current market.

The larger issue here is whether many of the technical indicators might be more predictive during flat markets than during trending ones, given their strong overlap with price in strong and weak markets. I will tackle this issue later today in the Weblog and in a Trading Markets article early this week. Much more research needs to be done over different time frames with different measures. I suspect, however, that there's something here...

2 comments:

Paulo de León said...

Thank you for your insights once again. I´m a regular reader of your sites and blogs, they are a helpfull tool for us, traders.
Related, to your comments about volatility, i happened to follow very closely ES and NQ intraday High Low Ranges. Both of them in 2005 registered their lowest levels of intraday ranges in the last decades. However, the dropp in the ES is not so intense as the loss in frictional movement in the NQ. This later market is closer than ever to the ES in daily ranges (in %), as a matter of fact, one day of last week the High Low diference of the NQ was almost the same as ES in points. This is strange assuming: a) the composition of the indexes b) the level of both indexes c)historically the Nasdaq market is more volatile than the SPX.
I don´t know why the NQ market has lost is atractiveness, this lack of movement or activity is puzzling to me. And i have not read any comments regarding this.
Sorry about my english, my native language is spanish. I´m writting from abroad.
Tx, and keep up the good work. I appreacite your contributions.

Mhashe said...

Any way to find out how Volatility is a function of open interest? I don't think the relationship is a direct one, but tangential in that the more liquid the market the more automated black boxes that are unleashed onto that market. There has been an exponential increase in automated black boxes which I think are arbing out price inefficiency leading to lower intraday price ranges and faster overall trend changes.