Wednesday, February 08, 2012

High Finance (with translations)

From the Wikipedia article on volatility (financial) -

Volatility over time

Although the Black Scholes equation assumes predictable constant volatility, none of these are observed in real markets, and amongst the models are Bruno Dupire's Local VolatilityPoisson Process where volatility jumps to new levels with a predictable frequency, and the increasingly popular Heston model of Stochastic Volatility.[5]
{i.e. these are great models but not of anything that actually happens.}

It's common knowledge that types of assets experience periods of high and low volatility. That is, during some periods prices go up and down quickly, while during other times they might not seem to move at all.
Periods when prices fall quickly (a crash) are often followed by prices going down even more, or going up by an unusual amount. Also, a time when prices rise quickly (a bubble) may often be followed by prices going up even more, or going down by an unusual amount.
The converse behavior, 'doldrums' can last for a long time as well.
{i.e. Sometimes stocks prices go up and down, sometimes a lot.  Other times they don't.}

Most typically, extreme movements do not appear 'out of nowhere'; they're presaged by larger movements than usual. This is termed autoregressive conditional heteroskedasticity
{OK, now you're just messing with us.}

Of course, whether such large movements have the same direction, or the opposite, is more difficult to say. And an increase in volatility does not always presage a further increase—the volatility may simply go back down again.
{So these large movements of volatility indicate that the market is going to up - or down.  Or not.  Definitely messing with us.}



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  3. Anonymous4:34 AM

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