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I'm trying to run an SV model against prices of Euro/USD. For those not familiar with SV, its a volatility model in which each point gets its own volatility parameter $h_t$ with 3 main parameters that are derived using a monte carlo simulation (MCMC),

  • $\mu$ = average of the volatility across the entire sample set
  • $\phi$ = the weighting that the volatility of the last point has on thenext (predicted) volatility
  • $h_t$ = the most recent - {time interval}'s volatility.
  • $\sigma$ = volatility of the volatility

Once we have $\mu$, $\phi$, and $h_t$ we can predict $h_{t+1}$, that is, the predicted volatility of the next point, by $h_{t+1} \sim \text{Normal}(\mu+\phi(h_t-\mu), \sigma)$.

I'm wondering if I'm doing the next part correctly:

To put this into practice, we run a MCMC every 5 minutes, gathering those variables and predicting $h_{t+1}$. This results in a graph like this, for CME futures contract 6EU4 (September euro) with 5-period BBands also displayed. Ignore the shapes that appear on the graph.

enter image description here

It feels inaccurate, so I'm not sure if I'm doing something wrong. Did I understand the process correctly? phi is around .55 for the first half of the day, then jumps to .95 and stays there, which seems wrong, but I guess it isn't too surprising given the data...

R's package stochvol is taking care of the parameter estimation, so assume that the numbers themselves are accurate.

Should I paste the 5-minute Volume Weighted Average Prices here? its a pretty long data set. I'll edit it to do that if so.

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migrated from stats.stackexchange.com Aug 19 '14 at 16:29

This question came from our site for people interested in statistics, machine learning, data analysis, data mining, and data visualization.

You might want to migrate this question over to the Quantitative Finance forum, and get more/better responses there. If you feel your data/code are too long to post here, just link to it instead from pastebin, Google docs, etc. – rocinante Aug 18 '14 at 23:36
Ok, thanks. Is there a way to just switch it over or do I have to repost? And thanks to Patrick Coulombe for adding LaTeX. I looked around to try to do that and couldn't figure it out, now that I can see the side-by-side markdown in edits it helps. – hedgedandlevered Aug 19 '14 at 12:35
Why Volume Weighted average price? Why not EMa or WMA? You wrote good description for stochastic volatility – John Apr 16 '15 at 10:08

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