Price and vol

It is a well known fact that stock market prices are negatively correlated to the volatility. For those that are sufficiently inclined to learn more, there are ample papers out there in the world wide web to satiate their intellectual hunger.

This post does not corroborate facts with statistical tests (albeit they are not difficult to perform) but this post simply elucidates facts visually to make the savvy trader appreciate the idea. A very loose and common-sensical (common sense is hardly common and all that!) explanation of negative correlation is that when stocks are performing well, all is well etc but when they drop in value, then there ‘might’ be some issues associated with the stock and that is uncertainty and that translates into higher vols etc. You get the gist.

Data is taken from Yahoo for the S&P 500 and it is uncurated/untested for accuracy or typos. What I like about this negative correlation is the real world analogy of a sea receding before a tsunami. While uncorroborated, there is a general tendency for prices to explode just after the vols have plummeted. Whether this can be translated into a trading signal is perhaps a fodder for a different post. Without much further ado, here are the visuals.

The S&P 500 Closes above

The S&P 500 realized vols(20 days) above for every year

Some stylized facts of the vols every year and the correlation table displayed above..

Originally published at https://www.linkedin.com.