Info!! Pure Volatility: A Mensurate Of Stock Marketplace Efficiency

The recent postal service took a await at a research-based mensurate I constructed for assessing buying together with selling pressure level inward the stock market.  H5N1 different--and as challenging--project has been the creation of a novel mensurate of stock marketplace position volatility.  Across nearly fourth dimension periods I've investigated, the volatility of SPY has been really highly correlated alongside the book of trading--generally past times .80 or higher.  For all practical purposes, the 2 are the same measure.

What I wanted to produce is build a volatility mensurate that is independent of volume.  This mensurate of what I telephone phone Pure Volatility represents the drive inward the marketplace position per book unit.  H5N1 high Pure Volatility marketplace position moves to a greater extent than for a given sum of book than a depression Pure Vol market.  If y'all click on the higher upwards chart, you'll come across that naught represents average Pure Vol; values higher upwards together with below correspond high together with depression Pure Volatility.

Thus far inward 2014, close term returns inward SPY convey been superior next high daily readings inward Pure Volatility.  When daily Pure Vol has been inward its highest quartile, the adjacent hateful solar daytime inward SPY has averaged a arrive at of .14%.  Across all other quartiles, the adjacent hateful solar daytime inward SPY has averaged a arrive at of alone .01%.  Over longer fourth dimension frames, the number is fifty-fifty greater.  

What this suggests is that high Pure Volatility has tended to live on associated alongside cost momentum to the upside (high volatility pull leading to farther strength) together with reversal to the downside (high volatility weakness leading to rebound strength).  Backtests convey been especially promising when the Pure Volatility mensurate is combined alongside the measures of buying together with selling pressure level described inward the previous post.  In particular, high buying pressure level accompanied past times high volatility has been associated alongside superior upside follow-through inward SPY.  Odds for near-term reversals are higher when cost pull is accompanied past times depression Pure Vol.

Markets alongside high Pure Volatility are relatively efficient, inward that they motion a groovy bargain per unit of measurement of book input.  Low Pure Volatility markets are inefficient:  they motion lilliputian for a given sum of volume.  The tracking of waxing together with waning marketplace position efficiency together with inefficiency ends upwards beingness helpful inward identifying intermediate-term turning points inward the market--a theme I volition address inward a futurity post.

Further Reading:  The Volatility of Volatility together with What It Means
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