Elm seems confused and inconsistent. While in the book The Missing Billionaires and some previous papers they replace σ with a weighted average of volatility measures of different lengths (Such as GARCH ST and σ LT) they now apparently replace σ with the following -For the market risk level, instead of measuring this directly, practical considerations have led us to use as a proxy a 1-year momentum signal, which measures whether the market is above its 1-year moving average (low risk), or below it (high risk).9 Using momentum as a proxy for market risk level is consistent with momentum-scaling and volatility-scaling producing very similar results when applied to equity markets. blah blah blah
Source - Elm paper -Steadfast, Greedy, or Fearful?volatility, σ, equal to the past 60 business days’ realized stock market volatility.
https://elmwealth.com/steadfast-greedy-or-fearful/
See section on Volatility Targeting in appendix for above quote. Of course this paper is from a couple of years ago so maybe by now they have made a third change as to how they measure σ in the Merton share denominator. Image may be NSFW.
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BobK
Statistics: Posted by bobcat2 — Wed Jan 22, 2025 6:22 pm
