why does price tend to fall faster than it rises?

[trefoil]

Quote from bwolinsky:

Buy it or not, that's a mathematical thing.

An example is a two stock index, 1 for $10 per share, and 1 for $100 per share. Assume that sharesunderstanding is equal 1 for the $10 stock and 2 shares for the $100 stock.

The price weighted index and value weighted index will both start with a baseline value of 1

So our index (10+100)/2=55 and our value is also the same (10+200)/2=105

Now, move both prices in the indexes up 1% and see the change.

(10.10+101)/2=55.55/55-1=1% as expected
(10.1+202)=212.1/105-1=2%

If the difference isn't obvious it should be. You have the price weighted index less on the same move in the value weighted one. The value weighted version goes up by 2% because the value of the two shares of $100 per share increased by $1 increasing the value of the index by about 2%.

It is an average mathematical result to keep going down this line of thought and you'll find that price weighted indexes exhibit downward bias. If it's not obvious by this example I don't think another would help, but if you have questions....

Unless I'm missing something, the only thing you've demonstrated so far is that the value weighted one is more volatile than the price weighted one. The value weighted will also drop 2% on a 1% change in each of its 2 components in the above example, and the price weighted one will drop 1%. That doesn't demonstrate that the price weighted one has a downward bias, only that its delta is less than the delta on the value weighted one given an equivalent price change.
This is the same as that example that if something goes up by 10 from 100, it has to drop by 11 from 110 to have the same percent effect. Which means nothing if your entry is 100, since a 10 point move in either direction is 10% from 100, and as far as your p/l is concerned, the entry, not where it went at some point in between, is your fixed point of reference.
So, what am I missing?

 

[SunTrader]

Quote from bwolinsky:

It's not that it is a slightly greater amount but that it is ALWAYS A GREATER amount. No matter what, always.

It does no such thing.

If you are talking what I am talking.

If one day the S&P goes up/down 1%, the Dow might go up say 1.2%. Another day the S&P percentage-wise might move a little more.

Happens all the time.

Now the Nasdaq and R2K are higher beta movers so their percentage moves are not (most of the time) in line with S&P/Dow.

 

[stock777]

Quote from hoodooman:

Figured it out did ya? Use it and profit from it.

yeah, katch that nife

 

[veritas007]

The Leverage effect has been widely cited in academia for the relationship between price and volatility.

But according to a paper from MIT researchers, the leverage effect doesn't matter.
http://jasminah.com/Papers/Leverage2.pdf


"One of the most enduring empirical regularities in equity markets is the inverse relationship
between stock prices and volatility, first documented by Black (1976) who attributed it
to the effects of leverage. As a company’s stock price declines, it becomes more highly
leveraged given a fixed level of debt outstanding, and this increase in leverage induces a higher
equity-return volatility. In a sample of all-equity-financed companies from January 1972 to
December 2008, we find that the leverage effect is just as strong if not stronger, implying
that the inverse relationship between price and volatility is not based on leverage, but is
more likely driven by time-varying risk premia or cognitive mechanisms of risk perception.
"

 

[efficiency]

Quote from 1a2b3cppp:

This seems to be the trend on daily charts.

Put another reason, red bars tend to be bigger than green bars.

Any reason? Panic and emotion?

The specialist/market maker racing to cover his shorts with minimal participation. As a by-product he's cleaning out hard stops to replenish inventory.

 

[Spooz Top]

Quote from 1a2b3cppp:

This seems to be the trend on daily charts.

Put another reason, red bars tend to be bigger than green bars.

Any reason? Panic and emotion?

Gravity

 

[Colyn.Rosenthal]

Quote from Spooz Top:

Gravity

Colyn.Rosenthal
Registered: Jun 2011
Posts: 49
09-02-11 12:27 PM

--------------------------------------------------------------------------------
Quote from KDASFTG:

"Fear is a much stronger emotion than Greed".
--------------------------------------------------------------------------------


+1

My mentor called this "Market Gravity"!

 

[murray t turtle]

Quote from 1a2b3cppp:

This seems to be the trend on daily charts.

Put another reason, red bars tend to be bigger than green bars.

Any reason? Panic and emotion?

==============
Mr 1abc;
a]Several reasons;
i agree as the elitetraders said, bear market{200dma says bear/ sell},
& market gravity, since markets tend to reflect a slice of life.Bull trends dont red[sell] candle much.

b]Another slice of life;
plane crashes , towers/ falling tend to be much faster than plane takeoffs/towers building[9-11 was already in a bear market]. A early bull trend[on 9-11] would have likely ignored that incident

c] Lots of technical/fundamental/fund reasons why ;
not related to [a] or[ b] .Not really even panic selling although some sell that way.LOL. Its planned selling; C is still, actually still below 5.00[10 for 1 stock split].BAC has closed there[below$5] on monthly candles.
Who knows maybe Warren can turn it around, Country WideMortgage & all

They used to disclose stock splits..................................................

 

[volente_00]

Because fear is stronger than greed

 

[SnakeEYE]

Hi,i`m new to trading.So my Q is,

why does price tend to rise faster than it falls?

:eek: