Price Risk Factor (PRF)

with defaults:

Here alpha_(u, t) is a measure of price ratio over a given fraction of time determined by the scale r_(u, 2). The parameter r_(u, 1) defines an “expected maximum negative” for the asset price movement in a given period of time. This value can be selected on the basis of historical asset volatility. For simplicity, in the current implementation the product lambda_(u, 1, SHIFT) * r_(u, 1) = - 1 so that alpha_(u, t) measures the relative price change from the previously measured price over a given fraction of time, as a percentage. Hence this formula represents a measure of price velocity.

These parameters have been selected in such a way that the price risk as measured by the protocol will saturate for price changes in one minute of -2% and +8%:

Since we compare the current velocity to the historical maximum, u is referred to as the “Shock”.

We then produce the Price Risk Factor:

Last updated