Monte Carlo Simulations For S&P500 Volatility Timing Model

Posted on Fr 29 Juni 2007 in Stocks • 1 min read

S&P500 Volatility Histogram

I bought a Monte Carlo Simulation for Excel this week and started to play around with it for my S&P500 Volatility Timing Model. Boy am I having fun! I ran the probability of a Financial Asteroid (FA) event happening in a Gaussian distribution world. Based on the simulation, we have a 0.04% chance of a major correction happening and we can expect 4 such events to occur over 10,000 observations.

This means that roughly 1 FA event will occur every 9.9 trading years (a trading year has about 252 trading days in it). Now, I wonder what happens if I use a Power Law distributive function instead. :)