distributions gone pear-shaped
February 4th, 2009
One of my favorite tools for strategy development is the distribution of returns a strategy will generate. As I’ve discussed before (and here and here), it’s an easily quantifiable characterization of a strategy’s “underlying nature” and can be used to engineer strategies that fit appropriate markets.
Given the enduring value of return distributions, I found this morning’s post in ft.com/alphaville especially interesting. They cite a Dresdner study examining the distribution of returns for Goldman Sachs’ prop trading in 2003 and 2008. Eye opening stuff.
normal
not so much
Wow, that’s a really cool pair of graphs!
One thing to note though — you could also end up with this distribution if everyone else is running around in a panic and you’re the only one holding firm…but that’s not to say this isn’t incredibly fishy!