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Old 04-16-2013, 10:50 AM   #21
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Originally Posted by swissaustrian View Post:
h/t to ZH for the following chart:

The current crash in gold was out of the value at risk (VaR) range for many models. The percentage change is so far away from regular price drops that it presents a black swan.

Wow, for those that are not familar with VaR, most finance people cover themselves for 2 or 3 standard deviations of risk and think they are good. A really conservative company might guard against 5 standard deviations at most.

Something being within 3 Standard deviations means you are covered 369 out of 370 events (99.73%).

For something to be outside 7 Standard deviations, you are talking about an event of 1 in 390,682,215,445!

Reference:
http://en.wikipedia.org/wiki/68-95-99.7_rule
http://en.wikipedia.org/wiki/Standard_deviation
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Old 04-16-2013, 10:59 AM   #22
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Yes, 1 in 390,682,215,445 .
Can you imagine? How many parallel universes did experience a similar drop? Not many. We're witnessing something very special here.
The 7 st.dev. move is a nightmare for options sellers by the way. They can't precisely calculate the risk (volatility) premium. Options prices have skyrocketed due to that. That's great news for the banks, ie the sellers. At least as long as we don't get another move like this, especially to the upside.
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Old 04-16-2013, 11:06 AM   #23
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A second note to VaR, options, and gold:
LTCM collapsed in 1998 due to volatility that was outside their expected range. They operated using VaR.
There rumors out there that LTCM was heavily short gold (400 tons) and that this was the true reason for the bailout. The FED had to prevent a disorderly spike in gold.
http://www.financialsensearchive.com...2007/0709.html

Interestingly, Jim Rickards was the General Counsel for LTCM during the liquidation. He denied the gold rumors:
Quote :
James G. Rickards, who sent us a letter, along with an affidavit from fund principal Eric Rosenfeld. Rickards stated that Long- Term Capital Management denied any involvement in the manipulation of the gold market, and Rosenfeld said to the Cafe, "None of LTCM, LTCP, nor their affiliates, has ever entered into any transaction involving the purchase or sale of gold, including without limitation, spot, forwards, options, futures, loans, borrowings, repurchases, coin or bullion, long or short, physical or derivative, or in any other form whatsoever."
http://www.gold-eagle.com/gold_diges...phy090899.html

However, I take anything that a guy with such intimate connections to the intelligence community (Iran hostage negotiator, Pentagon wargames) with a grain of salt.

Last edited by swissaustrian; 04-16-2013 at 11:10 AM.
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Old 04-17-2013, 06:02 AM   #24
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Even Dennis Gartman gets it:
Quote :
Dennis Gartman of The Gartman Letter, writes today:

"Concerning gold, let's note firstly something sent to us by our old friend John Brimelow, who had a most interesting piece in his commentary this morning regarding the violence of the recent price changes. He noted a piece written by Russell Rhoads, CFA of the CBOE Option Institute, who wrote the following:

"'Friday was a 4.88 standard deviation move in the price of gold. For simplicity's sake let's call it a five standard deviation move. Statistically we get a five standard deviation move approximately once every 4,776 years. So we should not expect another move like this out of the price of gold until May 17, 6789. ... Currently the two-day price change in GLD is 16.65, which can be converted to just over eight standard deviations. I wanted to share what this comes to, but the table I use only goes up to seven standard deviations. Let's just say the sun is expected to burn out first.'"
Gartman continues: "We shall confidently say that we will never, ever see a day such as we saw yesterday in the gold market in our lifetime again. It will not happen. The sun will indeed burn out before we see anything such as that again. Nor shall we ever want to see anything such as that again. We can reasonably deal with deviations from the norm of 2 or 3 or perhaps even 4, but 8+ standard deviations is beyond our ken or that of anyone else anywhere. Yesterday's price action will go down in history as an aberration of truly historic proportions.

"We judge the violence of the market's movements by the numbers of requests for interviews made of us, for the correlation between high numbers of such requests is nearly 1:1 with peaks and valleys of various markets. A large number of requests made of us is four or five a day; a truly large number is eight. Yesterday we had 12, and we've agreed to give several more today that we could not fit into our schedule yesterday. This befits an 8+ standard deviation day."

Ah, yes, "an aberration of truly historic proportions" -- but while central banks are the biggest gold traders, that aberration was still not large enough to prompt Gartman to put a question to a central bank or two. Yes, in that respect as well the sun will burn out first.
http://gata.org/node/12460
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Old 04-17-2013, 06:18 AM   #25
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He's willing to sensationalize, but not to dig too deep for answers.
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Old 04-17-2013, 06:29 AM   #26
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well, "we will never see a move like that" - "never", is a very long time...

I am by no means an expert, but VaR models are being questioned, in case of "black swans", by people much smarter than meself (James Rickards is one of them). In other words - use them when the sea is smooth, but do not expect them to work or give good guidance, in times of troubles - because static analysis doesn't really apply to the markets in every case - only in very specific cases (only where there is relatively low volatility).

He proposes that markets should be rather seen as dynamic systems, in which chain reactions are possible and quite expected, when times are rough- what makes some initial criteria met for a number of "actors" - they react, and they reaction changes the price, so it triggers reaction of other actors now (usually, in greater numbers than the first wave), etc...

Just you wait, if price rebounds strongly - how many people would think "this is it, the bottom is in", and jump on board immediately, pushing prices up nearly or as fast, as they went down? Will GATA report that "it shouldn't had happened"
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Old 04-17-2013, 06:51 AM   #27
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Does 7-9 standard deviations qualify as "blood in the streets"?
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Old 04-17-2013, 07:07 AM   #28
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Originally Posted by PMBug View Post:
Does 7-9 standard deviations qualify as "blood in the streets"?
More like nuclear armageddon. As benjamen said, there is a 1 in 390,682,215,445 chance for such an event Winning the jackpot in a lottery is more likely than that.
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Old 04-17-2013, 07:12 AM   #29
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Originally Posted by bushi View Post:
well, "we will never see a move like that" - "never", is a very long time...

I am by no means an expert, but VaR models are being questioned, in case of "black swans", by people much smarter than meself (James Rickards is one of them). In other words - use them when the sea is smooth, but do not expect them to work or give good guidance, in times of troubles - because static analysis doesn't really apply to the markets in every case - only in very specific cases (only where there is relatively low volatility).

He proposes that markets should be rather seen as dynamic systems, in which chain reactions are possible and quite expected, when times are rough- what makes some initial criteria met for a number of "actors" - they react, and they reaction changes the price, so it triggers reaction of other actors now (usually, in greater numbers than the first wave), etc...

Just you wait, if price rebounds strongly - how many people would think "this is it, the bottom is in", and jump on board immediately, pushing prices up nearly or as fast, as they went down? Will GATA report that "it shouldn't had happened"
Yes VaR is flawed. But the whole financial system is built on it. Especially the derivatives market. Imagine we would get a bond crash and all the outstanding interest rates swaps would blow up. That's one giant black hole
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Old 04-17-2013, 07:26 AM   #30
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Originally Posted by bushi View Post:
well, "we will never see a move like that" - "never", is a very long time...

I am by no means an expert, but VaR models are being questioned, in case of "black swans", by people much smarter than meself (James Rickards is one of them). In other words - use them when the sea is smooth, but do not expect them to work or give good guidance, in times of troubles - because static analysis doesn't really apply to the markets in every case - only in very specific cases (only where there is relatively low volatility).

He proposes that markets should be rather seen as dynamic systems, in which chain reactions are possible and quite expected, when times are rough- what makes some initial criteria met for a number of "actors" - they react, and they reaction changes the price, so it triggers reaction of other actors now (usually, in greater numbers than the first wave), etc...

Just you wait, if price rebounds strongly - how many people would think "this is it, the bottom is in", and jump on board immediately, pushing prices up nearly or as fast, as they went down? Will GATA report that "it shouldn't had happened"
Essentially, it is a statistics issue. The VaR model is based on the normal distribution, but in real life the correct model would have "fatter tails" than a true normal distribution. Essentially, the VaR model doesn't handle extreme (3+ standard deviation) events very well.

Reference:
http://www.fattails.ca/
http://en.wikipedia.org/wiki/Fat_tail
http://www.highbeam.com/doc/1G1-126933620.html
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Old 04-17-2013, 07:30 AM   #31
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Benoit Mandelbrot and Nassim Taleb have written extensively about the falsehood of Gaußian (normal) distribution in financial markets. They're are using fractal distribution instead.



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Old 04-17-2013, 08:14 AM   #32
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Originally Posted by swissaustrian View Post:
Yes VaR is flawed. But the whole financial system is built on it. Especially the derivatives market. Imagine we would get a bond crash and all the outstanding interest rates swaps would blow up. That's one giant black hole
That's why I've skipped the whole "educate yourself about financial markets" part, and went straight into PMs/hard assets - I think we are going to see the end of it in our lifetimes (soon, I'd say). The risks are enormous and keep pilling on, and I prefer to "Keep it simple, stupid"

It is interesting and refereshing, to talk about all that stuff with someone intelligent, but not biased, invested, interested, nor "educated" on the topic - people tend to grasp immediately, that the whole big picture is terribly wrong. But not when you are "established economist", nonono.... My wife is a prime example. She had a very tough childhood, so she is not terribly well educated in formal sense, but she is very intelligent, practical to the core, and seriously "no bullshit" kind of person. She usually keeps away from these "world issues", and keeps day-to-day practical. But occasionally, we speak about these things (it is OUR money, after all, so I don't make any serious decisions without consulting her), and I am always amused at her reactions. She is like "it is obvious, it cannot work long term", or "but it is clearly a fraud", or things like that. She shrugs her shoulders, and keeps carrying on . Makes MY life simpler

I suspect, most people only learn to think for themselves, when their life circumstances force them to do so. Otherwise, they tend to stop without thinking "what CAN possibly go wrong in that case, and what will happen if it DOES go wrong"

Again, statistical distributions, of all kinds, are also STATIC, they don't take into account the dynamics of the system. We can only crunch some (most recent) snapshot numbers, at any given time, and arrive at some conclusions.

But the whole system is not static, and it is full of feedback loops. Sometimes positive, sometimes negative, and sometimes - runaway feedback loops. I think that for most of the time, statistics CAN do a good job, but not when the whole system is in the "rough seas" mode. But what poor financial guys have to show other than these models - so they keep using them, and pray for all to go well...
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Old 12-12-2014, 08:57 AM   #33
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WTI oil has been crashing relentlessly during the last few months. It's primed for a volatility trade. The 50 dma is at 77, 200 dma at 94, current price at 58.
http://stockcharts.com/h-sc/ui?s=%24WTIC
These are massive gaps. They usually close. Momentum is very oversold. Does it mean it will revert immediately? Is the crash over? I have no idea. I am 99.9% sure that it is going to be very volatily though, so I started another volatility trade with options, description of the design of such a trade is in the op of this thread.
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Old 01-13-2015, 01:55 PM   #34
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I have closed my puts today, oil so oversold and we will get some bigger rebound soon I think. I am keeping the calls and see if a rebound goes above 60.5 which would be the profit barrier for my calls. The net trade will be positive no matter what happens from here on, because I made a killing on the puts.
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