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Edgar Peters (Chaos and Order in the Capital Markets) has an interesting
way of displaying the difference in the distribution of a securities
returns and a normal distribution of returns. You simply subtract the two
numbers. The resulting plot reveals much about the trading dynamics of
the security. In Peter's original studies large data sets were used (some
in excess of 20 years). I had wanted to see if this could be used for a
shorter time frame. In my study I used 60 days of daily OEX changes. I
think even at 60 days this information is valuable. The attached plot
shows the excess (of a normal distribution) in the negative 3 to 4
standard deviations and the positive 2 to 3 standard deviations. This is
the so called "Fat Tail" range for the OEX. Greater then expected moves
in the daily changes of the OEX are found more often then a normal
distribution would imply. Also the excess negative moves in the minus 0 -
1 standard deviations show the tendency for the OEX to make short term
moves to the downside greater then would be anticipated. This information
would be very useful when starting to trade something new or unfamiliar.
It will give a quick overview of the tendencies for the way something
trades on a daily basis.
ie more quick moves to the downside then the upside, ect.
Ron McEwan
Attachment Converted: "f:\eudora\attach\dist.gif"
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