How Volatile has the Stock Market been?

 

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After recovering from the March 2020 lows, the major indices (Dow, Nasdaq, and S&P) have been on a tear, reclaiming the earlier highs. 

On its way to retesting the old highs, the market did dip several times, offering better buying opportunities, especially in late May and mid-September. For example, after reaching 27,000 in late May, Dow quickly fell back to 25,000 and provided a similar opportunity again in late September.

Though the growth has not been a perfectly linear, the investors nonetheless fared very well who stayed on or bought the dips.

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The High-to-Low ratio is one of the quickest ways to understand market volatility. Obviously, the bigger the spread, the higher the volatility. In a stable market, this ratio will be range-bound between 101 and 103. When it spikes above 105, the market enters a phase of turbulence.

The above graph confirms that the market experienced a very high level of volatility in late May and early June; for example, from a low of 102.74 on 5/18, it dramatically climbed to 109.98 on 6/8, steadily retracing back to 103.03 on 7/56. 

Many quantitative funds and traders take advantage of this volatility via liquid derivatives like options on Indices, VIX, etc.  

Stay safe!

-Sid Som

homequant@gmail.com

Understanding the On-going Market Volatility

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