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Volatility (and XG outputs)

Posted By: Jeremy Bagai
Date: Tuesday, 20 December 2011, at 9:42 p.m.

In Response To: Volatility (and XG outputs) (Chuck Bower)

"However, a single number (i.e. JF's volatility) gives a quick view of market losing potential when used in conjunction with the static equity of the position. Anyone besides me miss that?"

Funny -- I was just having this exact conversation with David Levy and David Montgomery this week. I'm glad you asked, because I wasn't aware of the XG dice distribution panel either.

David Montgomery explained one concept that was both new and helpful to me: Volatility only becomes a useful concept in relation to the relevant take-point. That is, a position may have high volatility but if all that spread is under the take point it doesn't matter. Another position with a tight distribution centered on the take point is more likely to be a cube.

I understand you understood this when you wrote "when used in conjunction with the static equity of the position." What was new to me was that the interpretation of a single-number volatility value changes as the match score (and thus the take point) changes. That's why XG's useful histogram is normalized to EMG values, so you can see where the 1.0 take point lives.

So one useful single number to report is the % of market losers, which XG does. However, even when % market losers is high, if each of those many market losers only bring you to 1.05, you probably don't have a double now. Perhaps another useful metric would be (% market losers)(average market loss)?

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