Shortfall from Maximum Convexity

TL;DR

This paper introduces a new measure called Shortfall from Maximum Convexity for analyzing LETF returns, which offers better interpretability and statistical insight than traditional volatility measures, especially given the non-normality of the data.

Contribution

The paper proposes a novel volatility measure tailored for LETF returns that improves upon traditional methods in interpretability and statistical information.

Findings

SMC provides more intuitive interpretation than standard deviation.

SMC captures statistical information better in non-normal, dependent data.

The measure is specifically designed for LETF return analysis.

Abstract

We review the dynamics of the returns of Leveraged Exchange Traded Funds (LETFs) and propose a new measure of realized volatility: Shortfall from Maximum Convexity. We show that SMC has a more intuitive interpretation and provides more statistical information compared to the traditionally used sample standard deviation when applied to LETF returns, a dataset where normality and independence do not hold.