Wednesday, January 25, 2006

Range Bound Volatile Day

How much territory does a market cover in a day? I decided to add up all the one minute ranges in ES from 11/1/05 - present (N = 57 days). It turns out that the average total movement of the ES per day is 217 points, with an average daily range of 9.9 points. Today, the market traveled a total of 304 points, the second highest total in the sample. The only higher day was Friday's big move down, which came in at 307 points. Friday's range, however, was 23.75 points--fully 10 more points than yesterday's range. Friday was a volatile trend day, but today was a volatile, non-trending day. Indeed, when we look at past days with an approximate 13 point range, the average number of points traveled is under 230--well below today's total. I could only find three days in the sample in which we had a somewhat similar configuration of a moderately wide range and very large movement within that range. All three led to a relatively non-volatile market the following day, with ranges below 10 points.

This will bear further study. What we're seeing is that volatility--as defined by total range during a day is not the same as volatility defined as the total movement within that day. Although the two correlate highly--about .60--it means that only 36% of the variance in a day's range is accounted for by the size of minute-to-minute movement. High volatility range bound days may not have the same expectations as high volatility trend days, both with respect to directional follow through and carry over of volatility. My initial findings suggest that institutional participation is higher during the trend days, creating greater price and volatility persistence. I hope to post further results in the near future.