2
$\begingroup$

In his book 'Dynamic Hedging', Nassim Taleb gives the relation:
P = 1.67*historical volatility, where P is the Parkinson number.

What is the basis of this relationship. Does this hold under special situations, or always?
He goes on to say that if P is higher than 1.67*HV, then the trader needs to hedge a long gamma position more frequently.
Otherwise,he can lag the adjustment, letting the gammas run.

Why is this?

$\endgroup$
1
$\begingroup$

I do not know if there are still people following this question.

If the P is lower than 1.67HV, then we can conclude that there is a self-regression effect in markets. As a result, if a trader, who has long gamma, facing a relatively large price change, he needs to hedge his delta as soon as possible because the price is more likely to move backward and the trader would lose money in his short theta position.

$\endgroup$
2
  • 1
    $\begingroup$ What is the meaning of the number 1.67? is it $\frac{5}{3}$ or something else? Where does it come from? $\endgroup$
    – noob2
    Jan 29 at 22:23
  • 1
    $\begingroup$ The above question is answered here quant.stackexchange.com/questions/43794/… 1.67 = The square root of 4 log 2 $\endgroup$
    – noob2
    Feb 1 at 20:23

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.