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Hi Bilo,
interesting. Would you care to elaborate a little how you quantify this
second process?
As regards the mean reversion of volatility, the good news is that for some
option strategies such as ratio backspreads you really don't have to worry
much about its reliability because of the inherent loss limitation of these
positions. The great mistake of LTCM was to choose strategies whose *sole*
prerequisite was mean reversion. They finally did learn that lesson, if at a
price.
Michael Suesserott
-----Ursprüngliche Nachricht-----
Von: Bilo Selhi [mailto:biloselhi@xxxxxxxxxxx]
Gesendet: Tuesday, December 04, 2001 19:20
An: Omega List
Betreff: Re: puzzling probability and roulette a la Mark Brown
might i add ( since um currently working on volatility model )
that mean reversion isn't that only, volatility in addition to mean
reversion goes through increase/decrease cycles governed mainly by
information factoring/fading process. it is actually two overlapping
processes not just one. ltcm blew horn because they did not factor the
second process...and relied on mean reversion only.
increase cycle especially dangerous since volatility can snowball to
unexpected high value as information intake snowballs and ruin your mean
reversion model right there where you expect it to mean revert...
where as coin toss or roulette has no increase or decrease info cycles with
feedback because simply there is no information intake ( except the spin
itself )
unlike in trading, no memory thus governed by random process only. trading
not equal
gambling.
however even in roulette you might have a unexpected random10 reds in row
as you will likely be "mean reverting" after 3-5 to bet on black, right? :-)
the difference is the nature of the process... in trading it's random +
information factoring and feedback in game pure random event and since in
trading it's not always random,prediction is possible.
in trading is that new information begets new information begets
new information... ie there are information cycles. a turning point in
trading for instance is where one information cycle is overridden by an new
counter one. when volatility snowballs it is the result of the information
rolling snowball. compare that to a common information shock such as a news
event that creates initial jump in volatility aka price shock then fades and
reverts to the mean. selling volatility into the price shock will work but
not during the snowball. means defining the cycle ( increase or decrease )
you are in is as important as defining if you are under or over the mean
and how much.
in roulette there are no snowball cycles, no memory, in blackjack you might
have
a weak info cycle in there based on the sequence of cards and thus can have
a
better edge if you can determine the cycle by counting.
in roulette about average 100 wheel rotations you should expect about 3
times
of 5 reds or blacks in a row...etc. after that the probabilities of black or
red
are still 50%.
bilo.
> Gene,
>
> there is a measure which allows you to bet on reversion of amplitude over
> time; it is called "volatility". Frequently used by option traders.
>
> In fact, the mean reversion tendency of volatility is what makes many
> spreading strategies feasible in the first place.
>
> Best regards,
>
> Michael Suesserott
>
>
> -----Ursprüngliche Nachricht-----
> Von: Gene Pope [mailto:gene@xxxxxxxxxxxxx]
> Gesendet: Monday, December 03, 2001 04:34
> An: omega-list@xxxxxxxxxx
> Betreff: Re: puzzling probability and roulette a la Mark Brown
>
>
> We know that flipping a coin will create a "tendency" over time to revert
to
> a mean.
>
> We know that the stock market can "overshoot" more than flipping a coin
> before the same reversion over the same time.
>
> My question is... what is the "factor", probability or otherwise, that
> allows one to "bet" on this reversion over time and how is it measured?
>
> Please correct me if wrong, but is this not what Mark's system is about?
Not
> the odds of the "next" flip, but the tendency of the flips, once skewed to
> one side, to revert?
>
> Best regards,
>
> Gene Pope
>
>
>
>
>
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