Pencil and Ink at 41 Knots

The anemometer on the roof of the old statistics building gave a gust of 41 knots at ten minutes past two, and the man reading it wrote the number down twice, once in pencil and once in ink, as though the pencil might be persuaded to change its mind.

We had gathered to watch the VIX battery run its held-out sweep - the twelfth and thirteenth, two days of it, the L19 and L20 tiers executed while the wind made the windows rattle in their frames. The edge had been rated at 0.88, which is the confidence one affords a thing that has survived committee, referee, and the flattery of backtests. Regime shifts in the fear index predicting five-day returns: a real but era-dependent advantage, the bulletin said, and everyone in the room had repeated the phrase era-dependent to themselves the way one repeats a password.

The sweep came back at 0.55.

What struck me was not the number but the silence in which it was received. Nine men and one woman, all possessed of opinions about volatility, and none of them spoke for perhaps a full minute. The animal spirits which had carried the original estimate - for it is spirits, not proofs, that carry an estimate through its gestation - went out of the room like heat from an open door. The 0.88 had been a beauty contest after all: we had rated the edge highly partly because we believed others rated it highly, and the held-out replication, arriving unadorned and without regard for our expectations, was the one judge in the contest who declined to consult the crowd.

The austere position is that a downgrade from 0.88 to 0.55 is simply Bayesian updating, cold and proper, the arithmetic doing its duty. The arithmetic is doing no such thing. It is telling us that the edge was strongest precisely when the most people were being paid to believe in it, and that a regularity which depends on the era is a regularity with an author - the author being the era’s own appetite for the trade. The battery tier stands at 2 of 4, STRONG, which is respectable, and not reviewer-proof, which is the honest part.

The wind dropped by four o’clock. The gust recorded at 14:10 was 41 knots; the last reading of the day was 6.