Tanya,
               We care about PORTFOLIO VALUE CHANGES, not log-returns of a 
single contract, which has extremes in the behavior and can be fit to a 
fat-tailed distribution.   A 1.20 basis move, with 500 BCF position, is an 
extreme event, anyway you slice it.In the literature, as elsewhere, I agree 
for a single contract log-returns, they don't divide by vols.  

Regards
Naveen




Tanya Tamarchenko@ECT
11/10/2000 04:17 PM
To: Naveen Andrews/Corp/Enron@ENRON
cc: Vince J Kaminski/HOU/ECT@ECT, Vladimir Gorny/HOU/ECT@ECT 

Subject: Re: looking for "Fat Tails" in time-series for NGI-SOCAL  

Naveen,

I got NGI-SOCAL prices for prompt, prompt+1,...,prompt+59 contracts.
For each contract I calculated moving average based on 21 log-returns as
well as moving volatility. Then I calculated normalized log-returns:

[ return(t)-ave(t) ] / vol(t)

and compared the results to normal distribution. 

I COULD NOT FIND Fat Tails! 

Volatility changes a lot from day to day, so when people look at
log-returns (not normalized) it seems that there fat tails (big spikes, large 
returns more frequent than normal), 
which comes from the fact that volatility is not constant (at all).

See the spreadsheet is under O:\_Dropbox\Tanya

Tanya