A Richter scale for the financial market: is it possible? How to determine magnitude of schok in a stock market? This video proposes a new approach to financial market volatility analysis. Get more details here: I would like throughout this video to share with you a method that has the potential to better fit the risks we observe in the financial markets and to sound the alarm at necessary moments. There are many methods for analyzing stock market trends (Risk, volatility, overview ...), unfortunately, these methods are for the most quite complex to use. Of course, they do not allow us to identify the risk that characterizes the stock market as a whole. This method, which I propose, does not stand for All-Problems-Solver, but on the contrary, it contributes to the development of our imperfect and incomplete science. The idea come from the theory of social choice. The problems of choice and voting are as old as the world. One wonders: How to choose rationally and optimally. What we must know is that since the 18th century, two methods of voting (Borda & Condorcet) claim to be able to bring solutions to this problem. But we just have to look around for us to understand that it does not work really well. Moreover, a great contemporary economist (Arrow) has to demonstrate that there is no method of rational voting which can not be manipulated. (This is not exactly what he said, but the mathematical formulation is too long to explain). So it was by interpreting one of these methods and studying how to respect the Arrow’s conditions that I reached the method which I am going to present to you. The method is simple: I have a dynamic weighting system. The order defining the entry on each floor is dictated by factors such as risk aversion if it concerns investors, the profitability of the asset if it is index, etc. . See my article in the Journal of Economic Bibliography for more details. Subsequently, through a statistical regression, I defined a scale that will enable me to quantify the magnitude of an exogenous shock or of the temporal evolution. Like most units of measurement, this scale is relative. Just need to calculate the magnitude days after days or hour after hour. this being based on a day of the year (or hour) where the market was stable. By way of example, the 2008 crisis could be taken as a base point. If, by measuring the magnitude of the shocks on the state of the portfolio representing each market (NYSE, ...) or the Main Index (CAC 40. .) we find ourselves with a shock of a magnitude of 80%. (When the bubble is very large and ready to explode). Thus, when the magnitude of the shocks approaches 60-70%, it will be necessary to deflate the speculative bubble or to proceed to regulations. Too much blah blah, let's move on to the application. Suppose a Mr X, trader has a portfolio of XXXX assets. the 4X Index consists of 4 securities. Let us suppose this situation to be the stable state of the market (stationary). I inserted data randomly into the software. It can be observed that over time the red curve moves away from the stable state. Assets 3 and 4 appear to be very risky or unprofitable. Mr X observes how the XXXX index behaves and he can either decide to change or not the composition of its portfolio. When the magnitude of the shock becomes critical, regulators know that it is time to act and where to act.
