A measure of the variation in price over time. Also a measure of the risk of a financial instrument.
4
votes
1answer
68 views
Is my VaR calculation correct?
I want to use a ARMA-GARCH process to calculate the value at risk.
I use the rugarch package of R.
First of all, I specify my model:
...
8
votes
2answers
589 views
How does volatility affect the price of binary options?
In theory, how should volatility affect the price of a binary option? A typical out the money option has more extrinsic value and therefore volatility plays a much more noticeable factor. Now let's ...
1
vote
2answers
80 views
Relationship between European, American options volatility
Suppose, if the price of a European option (say a put) can be shown to be monotone in volatility (say for any maturity), does it follow that American options has to be monotone in volatility?
...
2
votes
2answers
138 views
Time Varying Volatility
If stock returns ($r_t$) are not auto correlated why is that the squared term of the returns (volatility) exhibit serial correlation? Does heteroskedacity, by its nature, imply that time varying ...
0
votes
0answers
64 views
Volatility of a rolling window strategy
What methods can be applied to determine the volatility of strategy using a rolling window? Using normal standard deviation would bias the results as the returns will be highly correlated. Although, ...
1
vote
0answers
58 views
How to measure if variance is greater at a certain time of day?
I'm not very fluent in the quant vernacular, so perhaps the nature of my question will be better illustrated as a hypothesis.
One market has closed and another market elsewhere on Spaceship Earth is ...
3
votes
2answers
89 views
Transformation to reduce standard deviation without changing median
Consider some negative skew and high kurtosis return time-series $X_t$. I do not know the functional form of the pdf of $X_t$ and have about 150,000 data points.
Suppose that I was to create an ...
4
votes
2answers
171 views
Fitting distributions to financial data using volatility model to estimate VaR
I want to fit a distribution to my financial data using a volatility model to estimate the VaR. So in case of a normal distribution, this would be very easy, I assume the returns to follow a normal ...
2
votes
0answers
154 views
Gamma vs. Volatility Risk
Original Question: What is the link between Gamma and the Volatility Risk?
It leads me to ask:
- What is the Volatility Risk definition and what are the good practices to measure it?
Thinking about ...
7
votes
0answers
127 views
How to estimate the following model?
Suppose I have the following model:
$$r_t=\sigma_t * \epsilon_t$$
where $r_t$ is the return at time t, $\sigma_t$ is the volatility, the model used to model this volatility is an exponentially ...
1
vote
2answers
276 views
What is the instantaneous P&L of a Variance Swap?
What is the instantaneous P&L of a variance swap.
Is it $(\sigma^{2}_{t}-\sigma^{2}_{implied})dt$?
5
votes
3answers
729 views
What really drives option implied volatility?
A common and oft repeated belief regarding options volatility is that implied volatility increases due to people bidding up a contract, usually related to anticipation of the outcome of an expected ...
0
votes
2answers
200 views
Why the implied volatilities calculated are so different
I Calculated facebook option(expired in 12/4/13) Implied Volatility with the Bisection Method. The program will be attached at the end. The results for different strike prices are so different:
...
3
votes
2answers
196 views
Black-Scholes and Fundamentals
So basically
$dS_t=\mu S_tdt+\sigma S_tdWt$
and
$\mu=r-\frac12\sigma^2$
I have just been thinking about this later equation. This is very interesting because it ties together risk-free ...
5
votes
2answers
298 views
Square root of time
I am writing about VaR and I am wondering about the following:
We can scale the VaR to different time horizons by using the square root of time, which means, that the volatility is adjusted by square ...
11
votes
4answers
2k views
Volatility pumping in practice
The fascinating thing about volatility pumping (or optimal growth portfolio, see e.g. here) is that here volatility is not the same as risk, rather it represents opportunity. Additionally it is a ...
3
votes
0answers
105 views
Fitting a non linear AR + GARCH(1,1)-M model
I want to fit the following model to a time series:
$$
y_{t}=\alpha_{0}+\alpha_{1}y_{t-1}+\alpha_{2}y_{t-1}^{2}+\lambda h_{t}+\varepsilon_{t}
$$
$$
...
4
votes
1answer
168 views
Stability of correlations and volatility
I had a discussion recently about the stability of volatilities and correlations. If we take for example stocks and bonds (think of DAX and Bund) then I have seen changing volatilities (something like ...
2
votes
0answers
81 views
EUR/PLN and EUR/USD delta-term-vol surface quoting convension
does anyone know for sure what is the FX market convension to quote delta-term pairs for EUR/PLN, for EUR/USD. I know that for EUR/PLN it should be delta p.a forward, for EUR/USD it should be delta ...
0
votes
1answer
68 views
0
votes
1answer
67 views
volatility Table and BS formula
assume I have implied FX volatility Delta-Term table from broker. I have time noticed as 2M, 3M. what do I have to put into BS formula, is it 2/12 or "count the business days"/"daycount basis"?
I am ...
2
votes
3answers
126 views
Logarithmic returns for realized variance?
I am wondering which method makes more sense when computing log returns. I am trying to compute log returns for realized variance, and I have the opening and closing prices for every minute.
Since ...
4
votes
1answer
150 views
How to use Newey West covariance corrector?
I have implemented the following model:
daily_vol(t+1) = A*daily_vol(t) + B*weekly_vol(t) + C*monthly_vol(t) + error
where vol means volatility, and A, B, C are ...
2
votes
2answers
176 views
Why FX Vanilla Options are quoted in volatility
I've been curious why vanilla options are quoted (and traded) in terms of volatility. Considering that every financial institution has its own options pricing model, volatility as an input would cause ...
6
votes
1answer
374 views
Conditional or unconditional volatility?
I am reading a paper (reference below) that states "The conditional volatility for each underlying security (or for a market index) can be estimated using the standard deviation of the stock’s ...
5
votes
1answer
243 views
Problems with dealing with GARCH models and intra-day data
Short question would be "Which type of model from GARCH family is most suitable for modeling 5-minute data returns ?" but I've added some story to it.
Long time ago I was preparing my thesis, one ...
2
votes
0answers
149 views
Markov-Switching E-GARCH with R
I am looking for a R library for modeling a Markov-Switching E-GARCH process.
In other questions at StackExchange related to GARCH models, the package rugarch is often mentionned. Do you recommend it ...
8
votes
5answers
1k views
What exactly is meant by “microstructure noise”?
I see that term tossed around a lot, in articles relating to HFT, and ultra high frequency data.
It says at higher frequencies, smaller intervals, microstructure noise is very dominant.
What is ...
2
votes
1answer
80 views
How to calculate two-time scale variance?
I am having trouble understanding how to calculate two-time scale variance as I do not have a strong mathematical background. Suppose I want to calculate the TSRV at 5 min intervals. Do I calculate ...
2
votes
1answer
126 views
How to calculate implied volatility and greeks in Bull Put Spread option strategy?
Ok, obviously I am buying lower strike put and selling higher strike put. What is the recommended volatility and greeks to consider in my trade?
Volatility:
Average volatility between both legs?
...
3
votes
1answer
94 views
Why are there different estimators for stock volatility? (realized variance, RAV, etc)
I am very confused about why different volatility estimators (RV, RAV, BPV, etc) exist. If the goal is to find the best estimator for stock volatility, and volatility is latent, how do I know which ...
4
votes
1answer
316 views
Volatility models using Rugarch
I have estimated sGARCH, EGARCH and TGARCH, which some for particular models are significant. For others, the alpha remain insignificant using various innovations such as the skewed variants of the ...
8
votes
2answers
479 views
Why do low standard deviation stocks tend to have superior future returns?
I've recently stumbled on something that really surprised me. These papers (1, 2) find that past standard deviation of returns is inversely related to future returns. That is, portfolio of low ...
3
votes
3answers
117 views
Avoiding negative volatility when applying Heston model
When applying the Heston model to generate the sample volatility surface, some of the volatility value will be negative. I am just wondering what do practioners normally do with these negative value. ...
4
votes
4answers
373 views
What are the advantages/disadvantages of these approaches to deal with volatility surface?
I would like to know if someone could provide a summarized view of the advantages and disadvantages of the approaches on the volatility surface issues, such as:
Local vol
Stochastic Vol ...
2
votes
2answers
124 views
Squared and Absolute Returns
I've always wondered why do one use squared or absolute returns to determine if volatility modeling is required for the return series? We understand that there are various tests for its ...
0
votes
1answer
51 views
Volatility Index Weighting Scheme
Among the several weighting schemes used for constructing volatility indices, which ones are the best for forecasting (realized) volatility? I've constructed a volatility index for emerging markets ...
4
votes
0answers
142 views
Asymmetric Volatility Modeling (Interpretation)
I am currently writing a paper on asymmetric volatility modeling of brent, gold, silver, wheat, soybean and corn from 1986-2012 and divided them into 4 sub-sample periods (i.e. 1986-1991, 1991-1997, ...
7
votes
2answers
713 views
What does the VIX formula measure and how does it work?
I have read the CBOE's white paper on the VIX and a lot of other things, but I need to honestly say, I don't really get it, or I am missing something important.
In semi-layman's terms, is the VIX ...
3
votes
1answer
140 views
What is the “leverage effect” for stocks?
I've read the so-called "leverage-effect" for stocks models the fact that if a company is leveraged, its volatility should increase as the stock price moves lower and closer to the level of debt.
Can ...
16
votes
6answers
9k views
What's the difference between volatility and variance?
How do they differ in what they imply about an underlying's (or any variable's) movement?
2
votes
0answers
111 views
Yield Curve Volatility
Let you have several issuers, and let each issuer have its yield curve built up with liquid plain vanilla fixed rate bonds.
Each yield curve has its slope and its curvature, and they obviously change ...
1
vote
1answer
212 views
How to interpret/use VaR and Standard Deviation?
The parametric VaR is defined as follows:
$$VaR=Z_a*Vol$$
Is this the best way to interpret how much risk is being taken on for a particular asset?
How does one interpret volatility on its own if ...
2
votes
3answers
402 views
Trading a synthetic replication of the VVIX (volatility of VIX)
In the same spirit as this question: Trading a synthetic replication of the VIX index.
The VVIX tracks the volatility of the VIX.
One cannot directly buy and sell the VVIX index and, as opposed to ...
10
votes
1answer
261 views
Is Arithmetic Return Bias Basis of Low Vol Anomaly?
An observation in capital markets is that the connection between return and risk (measured as volatility) is not that straightforward (at least not as modern portfolio theory assumes). One interesting ...
2
votes
1answer
139 views
How to enumerate all the possible portfolios with a given target volatility?
Let's say I have $n$ assets and their returns are stored in a matrix $X \in \mathbb{R}^{m \times n}$ (i.e. I have $m$ returns for each of them.
The covariance matrix of the returns is $\Sigma \in ...
2
votes
2answers
181 views
Should I use GARCH volatility or standard deviation in cross-sectional regression?
I want to do a cross-sectional study where the historical, medium-long run volatility of some return series (call it $R_t$) is included as a regressor. Which of the following two estimates of ...
15
votes
5answers
2k views
Skew arbitrage: How can you realize the skewness of the underlying?
It's not clear to me how to realize skewness. In other words, how do you implement skew arbitrage? There seems to be no well-known recipe like in volatility arbitrage.
Volatility arbitrage (or ...
3
votes
2answers
242 views
Backtesting VaR model violation independence
I am interested in hearing about the practitioner state of the art for testing the time independence of a VaR model (i.e. that VaR violations are independent in time). There are a number of tests in ...
6
votes
5answers
4k views
How to calculate historical intraday volatility?
Sorry for what must be a beginner question, but when I went to write code I realized I didn't understand exactly how historical volatility, or statistical volatility, is defined. Wikipedia tells me ...
