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6
votes
1answer
289 views

Variance replication using options

I would like to understand the intuition behind the following question: Why a certain weighted sum of prices of put and calls is equivalent to the implied variance of an underlying? A variance swap ...
37
votes
9answers
3k views

Lévy alpha-stable distribution and modelling of stock prices.

Since Mandelbrot, Fama and others have performed seminal work on the topic, it has been suspected that stock price fluctuations can be more appropriately modeled using Lévy alpha-stable distrbutions ...
5
votes
2answers
470 views

Choice of prior as a shrinkage target in portfolio construction?

There's various research showing how priors such as the minimum variance portfolio turn out to be a surprisingly effective shrinkage target in portfolio construction. The sell point of these priors ...
20
votes
7answers
32k views

What is the difference between volatility and variance?

How do volatility and variance differ in finance and what do both imply about the movement of an underlying?
1
vote
1answer
368 views

Calculating Variance Explained from PCA Loadings

I have a return history for a universe of risky assets and I've run a principal component algorithm and obtained a loadings matrix (num_factors by num_assets) for the first 5 factors. I have a ...
5
votes
1answer
2k views

How to calculate the conditional variance of a time series?

I am reading a paper where the term conditional variance is mentioned, but I am not really sure what is meant by this and how this can be calculated: Fig. 2 shows the conditional variances of the ...