30 years: Financial markets trader

In previous videos, Abdulla outlined the basic features of normal and lognormal distributions and their essential characteristics. In this video, Abdulla clarifies those differences in graphical form.

In previous videos, Abdulla outlined the basic features of normal and lognormal distributions and their essential characteristics. In this video, Abdulla clarifies those differences in graphical form.

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3 mins 58 secs

Overview

The video demonstrates a quick outline of the differences between normal and lognormal. The differences show up primarily through the shape of the curve given which figure is used on the x-axis.

Key learning objectives:

Briefly outline the difference between normal and lognormal distributions

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Summary#### What is the difference between normal and lognormal distributions?

We already know that in a normal distribution the numbers on the x axis are likely to be prices, percentage returns or indeed natural logs. They’re all normally distributed resulting in the bell shaped curve in each case. Because we’re using different units on the x axis, the differences don’t show up. To see them clearly, we’ll fix the x axis with a price scale and superimpose the probabilities associated with those prices using the two distributions.

Over to the lognormal distribution. In the log column we’ll convert the price into what is often referred to as a log return. Recall that we can think of the natural log as a continuous rate of return. In other words at what continuous rate would we need to compound or discount to get from the mean to any price interval.

To conclude. If prices are normally distributed we get the standard bell shaped curve. In a lognormal distribution, the curve will be bell shaped if logs are used on the x axis, but using a price scale, the distribution is positively skewed with a lower bound of zero.

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Expert### Abdulla Javeri

Abdulla’s career in the financial markets started in 1990 when he entered the trading floor of the London International Financial Futures Exchange, LIFFE, and qualified as a pit trader in equity and equity index options. In 1996, Abdulla became a trainer for regulatory qualifications and then for non-exam courses, primarily covering all major financial products.

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