More on Disappearing Daytime vs Overnight Volatility
A bit more data to go with my previous post on the subject…
The chart below shows the 1-year standard deviation of changes in the daytime (red) versus overnight (grey) session, for the S&P 500 futures & SPY since 1983.
I presented a similar chart in my last post, but here I’ve added 10+ years of data by using S&P 500 futures data prior to SPY’s launch in 1993 (and SPY thereafter) (1).
This expanded data set confirms the story of my previous post.
For the last 30 years, the daytime session has been more volatile than the overnight, usually by at least 50%. But over the last few years, the market has fundamentally changed and today, the daytime and overnight sessions are about equally volatile.
Daytime volatility is low today (a product of the bullish market), but overnight volatility is near its highest levels of the last 30 years, excluding the crash of 2008.
The next chart makes this clearer. Here I’ve divided the std. dev. of changes in the daytime session by the std. dev. of the overnight. Values greater than 1 indicate the daytime session is more volatile.
Note how daytime versus overnight volatility has been steadily collapsing to 1.0 over the last few years. The two are now more or less equally volatile (2).
Assuming this trend continues, I’m confident that it will impact not just day traders, but also traders like me taking short multi-day positions.
The math that we quantitative types use to model the market is based on a given set of market mechanics. Make a fundamental change to those mechanics and all of our indicators, analysis and edges implicitly have to change as well.
Just food for thought…
(1) Geek note: I’ve ignored October 1987 because the single gap down on Black Monday badly skewed the stats.
(2) This is all a little oversimplified because it doesn’t take into account intra-session moves (ex. highs and lows of the session), but that’s a post for another day.
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Filed under: Stock Market Mechanics, VIX & Volatility | 2 Comments