V.8:11 (419-422): SIDEBAR: Assessing volatility's predictive value
Product Description
SIDEBAR: Assessing volatility's predictive value
To assess the predictive value of volatility, I reviewed 1,443 days of price action on the Standard & Poor's 100 stock index, starting on May 15, 1984. Volatility was measured by the standard deviation of percentage change in closing prices over a 20-day period and the ensuing price action by the ratio of the highest to the lower closing price in the 30 days following the end of the volatility estimation period.
If periods of low volatility are followed by large price moves, the coefficient of correlation between volatility and price action should be large and negative — large because volatility and price action are deemed to be closely related, negative because they vary in opposite directions.
To assess the predictive value of volatility, I reviewed 1,443 days of price action on the Standard & Poor's 100 stock index, starting on May 15, 1984. Volatility was measured by the standard deviation of percentage change in closing prices over a 20-day period and the ensuing price action by the ratio of the highest to the lower closing price in the 30 days following the end of the volatility estimation period.
If periods of low volatility are followed by large price moves, the coefficient of correlation between volatility and price action should be large and negative — large because volatility and price action are deemed to be closely related, negative because they vary in opposite directions.
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