DowJonesriseandbunchedupvolatility

Dow Jones has jumped up by 1173 points which is close to 4.5% in percentage terms. The 5% kind of moves on daily basis in the most liquid and most researched asset class points to the fact that something underlying is in churn and undecided. The participants one day are fearful of the virus, second day they shrug of the liquidity line by Fed but on third day they are optimistic beyond doubt when a candidate with socialist bent looks like getting behind in the race for presidential candidature nomination.

For the students of probability this (US President Democratic candidature) is an interesting example of Bayesian probability in action. Bayes theorem refers to the concept of conditional probability. Someone will get on top in candidature and then that person will defeat the incumbent and then the winner will implement his policies, involves multiple conditions to get fulfilled in sequence. But the markets by their very nature are best equipped to assimilate all these probabilities and put a price. The important thing to note is that at least in the cases of politics, there are established patterns from yesteryears from where probability estimates can be derived. In the case of virus there are no possible historical patterns to rely upon.  

Taking cue from the US markets, Asian equities are also up, Hang Seng, Indian equities are in the green zone. The Indian Rupee though is still hovering around the high point since November 2018 around 73.50. TRY, ZAR, IDR have appreciated and are off from recent sell offs.

In his book The Misinformation in Markets Physicist Benoit Mandelbrot writes that the financial markets in their behaviour are akin to earthquakes where one tremor increases the possibility of a follow up tremor hence we find that volatilities are all bunched up. There are periods of calm and then there are periods where multiple events happen in quick succession. What we are possibly seeing currently is one such period where every accentuated move will follow other such moves. Mandelbrot then moves on to give an explanation of why this happens in quite detail. We will take that up in a later note.