Figure 6.8 shows what the October 1987 crash looks like through the per-
spective of the ratio adjusted data (RAD) contract, with the latest roll made in
September 1999. This time, the high of October 2 is at 486, and the low of October
20 is at 264.15, for a point difference of 221.85 points, but with a percentage dif-
ference once again equal to 45.6 percent [(486 264.15) * 100 / 486]. This
increase in magnitude measured in points is due to the upward transition because
of the many rolls. The important thing is, however, that the percentage-based move
stays intact at 45.6 percent.
To get a better feel for the benefits of the RAD contract, let’s compare it to
the drop during the fall of 1998, which became the new dollar-based record drop.
During October 1987, the market fell 152 points, or $38,000, or 45.6 percent—
this we know. During the fall of 1998, the market fell from a July high of 1199.4
to an October low of 929, for a total drop of 270.4 points (as measured on the
nonadjusted contract). In dollar terms, this equaled a drop of $67,600 (270.4 *
250). That is, almost twice as much as the October 1987 drop. In percentage
terms, however, the drop of 98 only equaled 22.5 percent of total market value.
That is, the drop in 1998 was not even half as bad as the crash of 1987. In fact,
to equal the crash of 1987 in relative terms, the 1998 drop would have had to con-
tinue all the way down to the 652.5 level, for a total drop of 546.9 points, or
$136,725.
Thus, the crash of 1987 is still the largest relative drop in equity in modern
times (aside from the latest bear market in NASDAQ). And, if you, in your system
building and analysis work, would like to treat it as such to make your systems
more robust and give them a better chance to hold up in the future, the only way
to do that is to use the RAD contract in combination with the percentage-based
performance measurements described earlier.
Another major advantage of the RAD contract is that it can never go nega-
tive, which can happen with the point-based contract. The major disadvantage of
the RAD contract is that it’s not supported by any major analysis software pack-
ages, although it is supported by a couple of data providers, such as CSI data
(www.csidata.com) and Genesis data (www.gfds.com). To calculate the values for
the RAD contract yourself, using the nonadjusted contracts as a base, you can use
the following formula:
NPOC OPOC * [(PNC OPOC) / PNC 1]
Where:
NPOC = New price of old contract
OPOC = Old price of old contract
PNC = Price of new contractCHAPTER 6 Quality Data 75