November 19th, 2008, 8:48 pm
Oh... I think I get why you think the thread is "useless" and now I understand why you asked about the direction of the market: you thought I was basically asking whether it makes sense to go long or short the market. Ha!That's not what I was asking. There are 2X ETFs that target 2 times the daily return of the underlying index, and there are also -2X ETFs (inverse ETFs) that target 2 times the inverse daily return of the underlying index.So, if I wanted to short the market, I could either buy the inverse product, or short the long product.If you compare the returns over the past year from shorting the long 2X equity products (i.e. SSO) vs buying the inverse counterpart (i.e. SDS), you'll see you would have been better off shorting the 2X long (SSO) than buying the -2X product (SDS).The reason for this is mostly related to compounding and the oscillating daily returns. If the underlying had returns of 5% and -5%, buying the inverse (SDS) would have lost you $1, while shorting the 2X long (SSO) would have made you $1.But, using St=S0*exp(r1+r2) as in my orginal simulation, you'd be flat in both long SDS and short SSO, which is clearly wrong.So my main question is: if I want to simulate stock prices where St=S0*(1+daily_return) rather than St=S0*exp(daily_return), how do I adjust (if at all) the formula for generating daily returns?Apologies for the confusion and thanks for your help...
Last edited by
replacement on November 19th, 2008, 11:00 pm, edited 1 time in total.