{"id":40890133,"date":"2023-03-09T13:10:04","date_gmt":"2023-03-09T07:40:04","guid":{"rendered":"https:\/\/stockviz.biz\/index.php\/?p=40890133"},"modified":"2023-03-10T10:26:48","modified_gmt":"2023-03-10T04:56:48","slug":"large-moves-happen-together","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2023\/03\/09\/large-moves-happen-together\/","title":{"rendered":"Large Moves Happen Together"},"content":{"rendered":"\n<p>We are often told that missing the 10-biggest days in the market leads to sub-par returns. While it is certainly true, what is often not said is that those really big days occur around really bad days. Welcome to tail-risk.<\/p>\n\n\n\n<p>The average daily return of the NIFTY 50 is 0.06%. The worst daily return is  ~ -13% and the best is ~18%. Welcome to tail-risk.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/technical\/return-distribution\/NIFTY%2050%20TR.daily-return-density.BH.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>In any given year, there are a lot of days when returns fall out of 1, 2 or even 3 standard deviations (<em><strong>\u03c3<\/strong><\/em>s), Up <em>and<\/em> Down.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/technical\/return-distribution\/NIFTY%2050%20TR.outliers.annual-count.BH.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>And these <em><strong>\u03c3<\/strong><\/em> moves tend to happen close to each other. i.e., volatility <em>clusters.<\/em><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/technical\/return-distribution\/NIFTY%2050%20TR.outliers.histogram.BH.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>What the histogram above is showing is that most of the 3<em><strong>\u03c3<\/strong><\/em> moves have happened within 5 days of each other! Let&#8217;s zoom in on a 10-year period of the index and mark the outliers on it:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/technical\/return-distribution\/NIFTY%2050%20TR.outliers.2000-2010.BH.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>Now, lets pick a very simple actively managed strategy that tries to side-step the <strong>&#8211;<\/strong><em><strong>\u03c3<\/strong><\/em> moves. The details of the strategy itself is unimportant. Suffice to say that it creates excess returns compared to buy &amp; hold.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/technical\/return-distribution\/NIFTY%2050%20TR.daily-return-density.SMA20.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>The average daily return of this strategy is 0.07%. The worst daily return is  ~ -7% and the best is ~18%. At least some of the left-tail has been clipped but at what cost?<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/technical\/return-distribution\/NIFTY%2050%20TR.outliers.annual-count.SMA20.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>Notice how both the number of large Up <em>and<\/em> Down days are lower here compared to buy &amp; hold?<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/technical\/return-distribution\/NIFTY%2050%20TR.outliers.histogram.SMA20.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>Outliers still cluster but there a lot less of them.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/technical\/return-distribution\/NIFTY%2050%20TR.outliers.2000-2010.SMA20.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>This is the nature of market volatility. Investors have to either commit to buy &amp; hold and catch <strong>all<\/strong> the moves <em>or<\/em> commit to an actively managed strategy knowing that while trying to side-step <strong>&#8211;<\/strong><em><strong>\u03c3<\/strong><\/em> moves, some <strong>+<\/strong><em><strong>\u03c3<\/strong><\/em> moves will also be sacrificed. It is the FOMO that keeps investors switching between the two, resulting in sub-par returns. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>We are often told that missing the 10-biggest days in the market leads to sub-par returns. While it is certainly true, what is often not said is that those really big days occur around really bad days. Welcome to tail-risk. The average daily return of the NIFTY 50 is 0.06%. The worst daily return is &hellip; <\/p>\n","protected":false},"author":2,"featured_media":2091813,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[1150],"class_list":["post-40890133","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","tag-volatility","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/40890133","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=40890133"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/40890133\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/2091813"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=40890133"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=40890133"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=40890133"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}