In his latest interview with Danielle DiMartino Booth, Chris Cole discusses volatility is off the scale. Here’s an excerpt from the interview:
Cole: There’s many many natural systems that follow power laws, and one of the things that follow power laws are financial systems, well you can actually plot, and this is one of the things that’s relevant to my market.
I’m a vol trader. Artemis is a volatility trading shop. The movement of volatility follows power law distributions. So this is where it gets really interesting…
Host: So wait just for two seconds. You’re talking about as risk builds in the system it tends to look like a Richter Scale?
Cole: Yes, that’s right.
Host: Tends to behave like a Richter Scale.
Cole: Yeah, in percentage changes in an asset follow these power distributions.
So like classically in this sense we can look at maybe the ultimate power law violation would be 1987, the Black Monday Crash.
Well if we go and look at volatility since the Vix started in 1990, and we look at kind of movement of implied volatility going back over three decades we can plot that very nicely on a power law scale, very efficiently on a power law scale.
So of course what becomes interesting is to see, what movements in the Vix, or in this sense the volatility or expected volatility of the market are beyond that power law distribution.
As it turns out the stats are incredible, almost 75% of the top power law moves that exceed what a power law line would indicate, have occurred in the last four years!
You can watch the entire interview here:
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