that thing called volatility

even though a statistical term but used all the time in financial world, volatility is defined as the standard deviation of change in the price of an asset.. it's an indicator of the stability in the market, high volatility indicates that things are going hay wire.. another characteristic of volality is its asymmetricness, volatility tends to drop when investors are making money and everybody is feeling happy while it tends to shoot up when investors start losing money and everybody crying foul.. so why so much talk of volatility.. well that is the talk of town these days.. so i thought may be i will also add my bit to the turmoil..

the benchmark of market volatility is CBOE VIX which stands for chicago board options exchange volatility index.. it is calculated based on the implied volatility of options traded with S&P 500 index (another benchmark, this time of broad stock market in US) as the underlying.. those who want to learn the actual calculations involved in the computation of VIX can read the white paper here..

coming back, this vix has been trading between 10-13 since start of 2007 when suddenly in february end, the first panic of subprime started and it reached levels close to 20.. panic calmed down and the index dropped below 15 in three weeks time.. everything was fine again until the end of june when the subprime fear (which was contained in US earlier during the feb-mar panic) started spreading to EU & Asia and to other asset classes considered unrelated to subprime.. vix went crazy and jumped above 30, a level last seen during the end of dot-cum bubble in 2002.. after 2.5 months of lunacy, where investors were selling practically anything and everything except their clothes may be, some sanity is finally returning to the markets.. and vix has also obliged by dropping below the level of 20 since mid september..

so why suddenly so much talk of finance & markets.. well given the kind of work i do, i happened to notice some similarity between the reaction of investors to the financial markets & that of indians to the performance of our cricket team in 2007.. both have been extremely VOLATILE !! considering that these two are very distinct & unrelated things (one may doubt this considering the amount of money involved in betting of matches), i was really tempted to see the correlation between the two events..

before i proceed with the results of my study, let me give a brief background on the performance of men in blue in 2007 just for the sanctity of this post (given that cricket flows in the blood of 99% of indians, i don't think this is required, but still).. our team went to the cariebean islands amidst huge uproar in early march and returned back in even greater uproar after they were knocked out even before super eight... burning posters/effigies greeted the players everywhere they went, their homes were attacked as usual and most of them have to take police protection for a few days.. these were the same players who were being cheered up & prayed for by the whole of our nation.. anyways things started to cool down and there were lots of changes in management apart from coming up of many different domestic leagues.. so when the time came to tackle the new format, a young team was sent to south africa for the first 20-20 tournament with the big three (sachin, ganguly & dravid) backing off realizing that their age doesn't permit them more demading tasks like mining diamonds :)

so our youthful team led by jharkhand-e-ratna mahendra singh dhoni went with zero expectations (he himself requested this of the countrymen with the genuine excuse that they have played only one 20-20 match before).. but their skills proved too good and they ended up winning the tournament after defeating biggies like south africa, australia and pakistan (twice :P) en route !! two days after the victory when the team arrived in mumbai and took the streets in "vijay-rath" from airport to wankhede stadium, it was as if the ganesh festival (which concluded only the day before) has been extended by a day this year.. at least this is what a 2 year old kid (subset of that 1% who don't have cricket in their blood) used to chanting "ganpati bappa morya" and watching big statues being carried on trucks/carts would have thought of the hue-and-cry that ensued.. it could be best summed up in dhoni's own words - "i have heard that this city never sleeps, but my team brought it to a standstill".. good one mahi..

knowing that i have already bored you a lot by now, i will give it a fast conclusion.. i have deduced that there is a high positive correlation (will need more data points from future to quantify the same) between the volatility in the financial markets & the volatility in the performance of indian cricket team.. furthermore, the latter is at a lag of 1-2 weeks of the former.. volatile markets from february end to march mid followed by extremely poor performance in cricket from march mid to march end; and then volatility again peaking in markets from july start to september first week followed by extremely good cricket performance starting from september mid.. given the fact that at times of high volatility in the financial markets all asset classes across all geographies get highly correlated to each other, this adds "performance of indian cricket team" as another asset class to the over burgeoning pool of traded assets across the world :)

as the men in blue get ready for the seven match series with australia, at least one eye of match fixers/betters should be on the markets in the first ten days of october.. volatile markets in this period could give them some indication that our team will either win or lose badly in the series which end by the last week of this month.. also they might invest some money buying straddles to hedge their exposures in fixed matches.. :P

khelo india khelo..