Olsen’s quake scale
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Foreign Exchange

Olsen’s quake scale

Anyone who has ever had the pleasure of talking to Richard Olsen will vouch that he possesses an evangelical zeal, even if they might not necessarily agree with all of his ideas. There is no doubt that he has played a huge role in shaping the FX market. If he were to have his way, he would change it still further.

Olsen’s latest project is the Olsenscale. This is an attempt to quantify market activity according to the Scale of Market Quakes (SMQ). Olsen says that the scale is a call to action. “We take weather forecasts for granted, but we don’t have anything similar for economics.” He adds that the measurement can be compared to the Richter scale, which measures the release of seismic energy during an earthquake. “The SMQ relates excessive pricing along various price and time scales to historical data by assigning a single number to it. On a constant basis, the scale therefore characterises the state of the market.”

I thought that implied and historical volatility already perform similar functions, but statistics never were my strong point.

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