[Abridged] Foundations: Market Structure, Volatility Targeting, Pod Shops & Other Gremlins
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2011-2026 delivered a 12.09% annualized real total return with a dividend contribution of only 1.76%. That dividend contribution is at the 1st percentile across 145 years of every conceivable 15-year block.
That is not all that makes recent market history special.
Market Volatility
This past week drove me to a study of volatility regimes.
Glosten, Jagannathan and Runkle (GJR) in 1993 looked into how markets react to up days and down days and published their findings in the Journal of Finance.
GJR defined the following.
Omega ω is the resting level, where nervousness settles when nothing is going on.
Beta β is memory, how much of yesterday’s nervousness carries forward.
Alpha α is how hard the market flinches when there is a big move.
Gamma γ is the extra fear, the asymmetric severity of the response to loss.
GJR’s 1993 paper provides the formulas for my study.
Relative to the 1985-2000 era, a big down day in the present era triggers ~4x as much chaos but markets have less next-day memory, and the residual fear dissipates ~2x as fast.
