Monday, September 19, 2016

Sources of Volatility for a Large-Cap ETF


Sources of Volatility for a Large-Cap ETF

Question:   Stocks change from day to day.   The total change is the closing price of the most recent day compared to the previous day.  Part of the change involves intraday price changes – the closing price in the day minus the opening price change.  Another part of the total price change is the overnight price change – the open price of the current day compared to the close price of the current day.

Evaluate statistics on the total daily price change, the intra-day price change and the over-night price change for Vanguard large-cap ETF stock fund VV.


Data:   The data used in this post involves daily stock price changes for Vanguard fund VV.   The link to the historical daily data for the fund is below.



The data covered in this post covers the period from the fund’s inception on January 30, 2004 to September 16, 2016. 

The daily change value is difference in stock price of current day minus stock price of previous market day as a percent of stock price of previous day.

The intra-day change variable is the closing price minus the opening price as a percent of the opening price.

The inter-day change price is the opening price of the current day minus the closing price of the previous day as a percent of the closing price of the previous day.


Analysis:

Descriptive statistics for the daily change, the intra-day change and the inter-day change are presented below.

Daily Change and Intra-day Change for a Large Cap ETF
Daily Change
Intra-day Change
Inter-day Change
Average
0.00036
-0.00015
0.00044
Median
0.00078
0.00034
0.00066
Stand deviation
0.01195
0.00973
0.00696
skew
-0.08159
-0.20989
-0.29673
kurtosis
11.12289
10.00726
9.94566
Min
-0.08943
-0.07945
-0.05864
Max
0.11458
0.07478
0.05259
10th
-0.03533
-0.02781
-0.02102
90th
0.01184
0.00902
0.00697



Sample covers stock prices for ETF VV vanguard large-cap fund covering the period February 2004 to September 16, 2016.   Total number of observations is 3,180.

Observations:

The average intra-day change is negative.

The average inter-day change is positive

The median intra-day change and the median inter-day change are really small.

Intra-day and inter-day price changes are negatively skewed. 

The positive kurtosis suggests that a histogram of these return variables has a peaked distribution.  This makes sense because there are a lot of market days where price changes are relatively small.

Intra-day price volatility is higher than inter-day price volatility.  Witness both the larger range on intra0day changes and the larger standard deviation on intra-day changes.

What is the correlation of intra-day and inter-day price movements?

The correlation of the intra-day price and the inter-day price is 0.0015.   The intra-day and inter-day price changes are slightly positively correlated.


Thoughts:   The comparison between intra-day and inter-day price volatility couldn’t be conducted with mutual funds because mutual funds only trade at the market close. See previous post on some difference between  large cap and small-cap funds.

http://financememos.blogspot.com/2016/02/the-choice-between-mutual-funds-and-etfs.html

We show in this post the intra-day price movement is on average larger than the inter-day price movement.   Note that the the intra-day price change ((close minus open) is smaller than total intra-day volatility which is high minus low.  

On many days the market is relatively stable and intra-day price volatility might not be that big of a deal.  However, on some days there is a lot of intra-day price volatility for this large-cap ETF and this intra-day price volatility could substantially impact funds received from an ETF sale or funds spent on an ETF purchase.












1 comment:

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