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Pandora’s Risk: Uncertainty at the Core of Finance resources

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11 Resizing Risks Scanning price charts for channels has a bad reputation among economic theorists. Good traders do it anyway for the insight into uncertainty. It’s a secret of their suc- cess that shouldn’t stay secret. The extra information can warn of crisis and help all investors dynamically re- size their portfolios. However, it will never completely tame market risk. Pandora’s Equation won’t let it. While VaR lost every tournament described in Chapter 10, conventional standard deviation estimators didn’t win. Estimators based on daily trad- ing range walloped both. Th is chapter will explain how they work and show some useful things we can do with them. Range estimators are a formalization of what good traders have done for generations. Uncertainty is center stage for traders, and their livelihoods depend on managing it right, unlike a host of other risk managers who just report mea sures to others. So it makes sense that traders would evolve use- ful, intuitively appealing techniques. In saying that, I have violated one of the norms of fi nance. It says that theorists and discretionary traders should never take each other seriously. Th e very existence of this norm invites a closer look. Traders as Chartists Any big bookstore in a major fi nancial district will have a large section on fi nance nancial engineering. Some of the books there expound standard fi

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