Has Volatility Lost Its Edge?
by Mark G.Levey
Does volatility still offer the same advantage it once did in trading the Standard &PoorÕs 500 index? HereÕs a followup to previous STOCKS & COMMODITIES articles.
From a statistical standpoint, assuming an even chance of loss or gain on an investment, low-volatility investments offer significantly higher returns than
do high-volatility strategies. A low-volatility trading system beats a high-volatility system 70% to
80% of the time when given the same sequence of trading results. In winning systems, however, game theory shows that once the probability of winning exceeds 56%, high-volatility strategies prevail.
In reality, markets do not operate strictly according to
random walk theory. Since World War II, average values of stocks and bonds have appreciated overall, making the outcome of long trades over time a better than even bet. In the December 1998 STOCKS & COMMODITIES, Dick Stoken reviewed the outcomes of five trading strategies for assets of varying volatility during the period encompassing 1952 Š94.