- Joined
- 9/19/15
- Messages
- 100
- Points
- 28
I am reading a paper called "Principal Components as a Measure of Systemic Risk" by Kritzman and trying to understand some notion.
They authors calculate something called absorption ratio (AR) which is a time series (measured daily) measure of systematic risk in the financial market.
They then define the following:
ΔAR = (AR_15day - AR_1year)/σ where
AR_15day is 15-day simple moving average of AR,
AR_1year is one-year simple moving average of AR
σ is the standard deviation of one-year AR.
Then the authors calculate average annualized one-day, one-week, and one-month returns following a one-standard-deviation increase or decrease in the 15-day absorption ratio relative to the one-year absorption ratio.
How is "a one-standard-deviation increase or decrease in the 15-day absorption ratio relative to the one-year absorption ratio" related to the equation above? Do they mean that ΔAR increases/decreases more than 1 from the previous day? Or does it mean that the denominator sigma for ΔAR increases/decreases more than 1 from the previous day?
Thank you very much!
They authors calculate something called absorption ratio (AR) which is a time series (measured daily) measure of systematic risk in the financial market.
They then define the following:
ΔAR = (AR_15day - AR_1year)/σ where
AR_15day is 15-day simple moving average of AR,
AR_1year is one-year simple moving average of AR
σ is the standard deviation of one-year AR.
Then the authors calculate average annualized one-day, one-week, and one-month returns following a one-standard-deviation increase or decrease in the 15-day absorption ratio relative to the one-year absorption ratio.
How is "a one-standard-deviation increase or decrease in the 15-day absorption ratio relative to the one-year absorption ratio" related to the equation above? Do they mean that ΔAR increases/decreases more than 1 from the previous day? Or does it mean that the denominator sigma for ΔAR increases/decreases more than 1 from the previous day?
Thank you very much!