Question – Can you use volatility In DVB scores to modulate the indicators usage?
Historically, mean reversion type indicators have performed better in volatile conditions compared to trend following conditions (when the price does not pull back). Instead of using the market as a measure of volatility, can you use the indicator values themselves as a volatility proxy?
Calculation:
- Absolute difference in today’s DVB score to yesterdays.
- 100 period standard deviation of this difference.
- Let’s call the resulting calculation DVBVOL
Scenario 1:
- Trade DVB only if DVBVOL is decreasing.
- We would expect under performance in mean reversion measures due to decreasing volatility.
- CAGR from 2000: 15% (7.5% last 252)
- Drawdown: 13%
- MAR: 1.14 (CAGR divded by Drawdown)
Trade DVB only if DVBVOL is decreasing.
Buy & hold only if DVBVOL is decreasing.
Conclusions:
- Fairly consistent across over the years and sub periods. Poorer performance in last two years.
- Buy and hold performance shows complete lack of traction save for credit crunch
Scenario 2:
- Trade DVB only if DVBVOL is increasing.
- We would expect over performance in mean reversion measures due to increasing volatility.
- CAGR from 2000: 15% (27% last 252)
- Drawdown: 26%
- MAR: 0.6
Trade DVB only if DVBVOL is increasing.
Buy & hold only if DVBVOL is increasing.
Conclusions:
- Poor to flat performance pre 2008
- Buy and hold performance improves compared to other scenario
Summary:
- Unfortunately we don’t have a simple conclusion here as there appear to be two different distinct periods. Pre 2008 mean reversion performed better in a decreasing DVB vol environment. Post 2008 MR did better in an increasing DVB vol environment.
- Two different market modes, two different types of DVB.
- Can we capture the essence of these two different periods?
- Is acceleration a factor? E.g. Does the market move faster post 2008?
