Maximum Daily Change

J. Ignacio Ulacia F. (1.6.1997 Ver. 10.8.2004)

(file> INDEX-DailyChange)

The maximum daily change is the risk that an investor is willing to take on a daily basis once a position is placed. It is important to know what percentage risk can be obtained to the reward if the market goes the other way of the trade.

The Daily Change is defined as the Absolute difference of the Close of consecutive days with the reference of the mid point between the points as

DC= Abs(2* (Cn - Cn-1)/(Cn + Cn-1))

The information is then processed to find the frequencies in different % categories separated in a 0.2% per slot. Because the information is exponential. Following the general equation

log (f(%)) = m x(%) + b

The information is presented in Graph 3.1 It has been plotted in a log scale to compute the slope and intercepts of every index through linear regression from 0% to 4%. It is possible to see that values deviate from the general slope at very low values for Nasdaq and RUT. These higher tails will produce higher uncertainty in the computation of risk and is a confirmation that trading is not a random-walk process.


From the data we can see that DJIA, SP500 and RUT have similar behavior; However Nasdaq has a different slope and therefore it is more volatile.


Graph 3.1: Daily Change in percent. This graph was taken form the daily change form closing data form one day to the other taking the reference to the mid point between closings taken form data form DJIA (1.11.1928-10.8.2004), SP500 (22.11.1982-10.8.2004), NASDAQ (12.11.1984-10.8.2004), Russell 2000 (12.10.1987-10.8.2004).



Copyright 2005© J. Ignacio Ulacia F., All rights reserved