Rating Stocks, ETFs, Bonds, Futures
Highly complex financial products are characterized by convoluted dynamics and are generally more volatile and less predictable in terms of performance.
When applied to stocks or other financial products such as ETFs, futures or bonds, complexity reflects the following characteristics of the dynamics of the corresponding price:
• Memory/correlation – how current price depends on past values
• Ruggedness – how rocky and uneven the evolution of the price is
• Variability – the degree of instability, jitter, volatility
• Discontinuities and non-linearity
The above attributes affect negatively our ability to understand the dynamics of stock prices and therefore impact the capability to make robust estimates of their future values. As a general rule, less experienced investors should avoid financial products which exhibit complex dynamics.
The distribution of complexity of over 5000 financial products is illustrated below. It is far from normal.
Examples of complexity levels of various financial products are illustrated below.
NB. The complexity measures/levels indicated in the tables below are not static properties. Due to market turbulence they change in a dynamic fashion.
The complexity of stock dynamics can range from very low to very high.
Treasury bonds exhibit dynamics that is generally less complex.
The complexity of ETF dynamics can range from very low to very high.
Like in the case of ETFs or stocks, the dynamics of funds may be characterised by high complexity.
The complexity of futures may range from low to high.
VIX-based products are generally characterised by complex dynamics.