Systematic Trading by Robert Carver
Author:Robert Carver
Language: eng
Format: epub
Publisher: Harriman House
Published: 2015-08-26T12:20:41+00:00
Price volatility
We’ve established that a 1% fall in quoted price will cause a certain degree of pain, equal to the block value, for each instrument block of an instrument that you’re long. But how likely is a 1% fall in price? Equity prices can easily change by 1% or more in minutes, but a two-year bond might not see a 1% move over several months. How should you take these different levels of risk into account?
This is another job for volatility standardisation. You need to calculate an expected standard deviation of daily instrument percentage returns, which I’m going to define as the price volatility of an instrument. So for example the price volatility of an average equity is around 1%, whereas as I write this the German two-year Schatz bond future has a daily standard deviation of just 0.02%.
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