Benoit Mandelbrot

In 1963, studying cotton prices, Benoit Mandelbrot noticed that large changes tend to be followed by large changes, of either sign, and small changes by small changes.

Market direction is close to a coin flip, but the size of moves clusters. Robert Engle modelled this with ARCH in 1982 and Tim Bollerslev extended it to GARCH in 1986, still the standard in risk software.

Explore next

• Volatility: the human-scale measure of risk (MF007)
• Learning from forecasts in markets (ML016)
• Why one week of risk is so noisy (ML016b)

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