When Does This Ride End?
Interesting graph reproduced from a post by Macro Man showing daily returns on the Dow since late 1928 (blue) along with bands two standard deviations around zero (1-year lookback). Click to zoom.
A few non-surprises here. (1) Volatility from 2004 through most of 2007 was close to historical lows. (2) Current volatility is at levels only seen a few times in market’s history: the late 1920’s, various points in the 1930’s, and 1987. And (3) the market exceeds two standard deviations far more often than it would if it followed a random walk (an assumption of modern finance that is fatally flawed).
The reason that this chart caught my eye was how sustained volatility was in 1920’s and 30’s. We went years and years experiencing the kind of gut wrenching gyrations we’re seeing now. I know it’s dangerous to compare this market to that one, but if we allow history to be our guide here, this ride could be a long way from being over.
Happy Trading,
ms
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Filed under: VIX & Volatility | 3 Comments
If everyone is using mean variance optimizers for asset allocation, expect a move out of equities into mattresses :)