As discussed in prior posts, there are different ways to study the market volatility.
The two quickest way to eyeball volatility during very volatile periods:
1. Develop Scatter Plot of Daily Closing Prices (top graph) -- Due to the Coronavirus outbreak in the US, the Dow Jones Industrial Average (DJIA) daily closing prices fell from 27,091 on 3/4 to 18,592 on 3/23 -- a historic 31% collapse in a mere 14 days. In fact, the intra-day high on 3/4 was 27,102 while the intra-day low on 3/23 was 18,214.
Then, the index turned around and rose back to 24,009 on 4/9 -- a stunning 28% recovery (from the close on 3/23) in the next 14 days.
Since the first half was significantly more volatile, the Coefficient of Variation (COV) jumped to 13, compared to the second half when the COV fell to 6.
2. Compute Intra-day High Price to Low Price Ratios (bottom graph) -- The intra-day high to low price ratio gives a pretty good understanding of the volatility during a certain period. Based on this method, the volatility peaked on 3/13 (108%) and troughed on 4/9 (102%).
The polynomial trendline is simply ignoring some of the abrupt spikes, retuning a much smoother surface.
Considering that the time series is quite short here, a priori smoothing is unreasonable; otherwise a 2-to-3 day moving average is generally applied to the raw data to smooth out the outliers before a meaningful trendline is derived.
-Sid Som
homequant@gmail.com
Also Read:
Understanding the Market Volatility ... 12/2/2019 thru 3/2/2020
