A measure of the variation in price over time. Also a measure of the risk of a financial instrument.

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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 ...
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303 views

HFT to blame for Flash Crashes?

Some people 1, 2, 3 claim that High Frequency Trading is partly to blame for the extreme volatilities in the markets yesterday (24. August 2015). Is that true? Is the amount HFTs move even enough ...
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411 views

The T+H Problem in Factor model forecasts

Suppose we train on M individuals consisting of T observations (i.e. TxM design matrix). The dependent variable is one-year return for each security (H = horizon of one year). In a factor model ...
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288 views

Why linear interpolation not appropriate for volatility surface construction?

We know linear interpolation is not appropriate for constructing a surface, but why? In the book, "Foreign Exchange Option Pricing: A Practitioners Guide", the author writes: native linear ...
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332 views

Can classical economics explain *any* of the so-called stylized facts of finance?

I am doing some reading on the (historical) emergence of the Black-Scholes implied volatility smile for index options (yes - post 87), and I stumbled across an economic paper attempting to explain the ...
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973 views

Can American options with no dividends and zero risk-free rate be treated as European?

Let's say you've got American options on a future of a stock index. There are no dividends, and no risk-free rate either (assume $r=0$). Can these options then be treated as European from the ...
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SPX options vs VIX futures trading

Forward volatility implied by SPX options, and that of VIX futures get out of line. If there existed VIX SQUARED futures they could easily be replicated (and arbitraged) with a strip of SPX options. ...
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300 views

Why does the price of a derivative not depend on the derivative with which you hedge volatility risk?

I'm trying to derive the valuation equation under a general stochastic volatility model. What one can read in the literature is the following reasoning: One considers a replicating self-financing ...
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555 views

Do intraday volume and volatility share the same properties?

volatility clustering and mean reversion are very well known properties that one could use when trading. Traders, especially in options world, do take realized vol into account (e.g. by forecasting it ...
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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 ...
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Volatility-Based Envelopes

I am following an article by Mohamed Elsaiid (MFTA) about Volatility-Based Envelopes - a quite new technical indicator he has introduced, that is being used by Bloomberg. My goal is to get a simple ...
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213 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 ...
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1k views

What does it mean to be “long or short in volatility”?

I've heard a question regarding pricing of european calls. The question is: Is the call long or short in volatility when it is (deep) OTM? What is the profile of the implied volatility? I ...
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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 ...
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739 views

How to hedge against lack of volatility

Say you have a trading system that works best when markets are most volatile. What would be the best way to hedge against lack of volatility ? For example, 2008, 2009 was highly volatile and it has ...
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4k 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 ...
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259 views

How to measure investors' “experienced” volatility?

In asset allocation, you usually send reports to your clients where you will report the volatility of its portfolio. Assuming you only have monthly returns, you will compute volatility over a ...
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256 views

Does it make sense to use upward and downward volatility in option pricing?

Historically stocks have a higher likelihood to increase in price than to fall in price. As such would it make sense to split a stocks volatility measurement into upward and downward components? For ...
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Annualzing the log of daily returns riddle

Two popular ways to measure returns are Arithmetic returns and Log returns. Let's define arithmetic (simple period) returns as: P(t) - P(t-1) / P(t-1). Let's define log return as Ln( P(t)/P(t-1) ) or ...
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762 views

Varswap Basis - What is it in practice?

What is the varswap basis? I am not completely sure what this number represents. Is it the basis between the estimated future realized volatility and the vol surface implied volatilty at a specified ...
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165 views

Density forecast of a GARCH model

I am currently working on developing a series of density forecasts and I am encountering some problems. I am working on weekly S&P 500 returns and the returns process is described as $r_{t} = ...
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382 views

Variance swap replication and variance vega

Noob here. I've been trying to gain a better understanding of variance swaps and what better way than to replicate it with a portfolio of better understood instruments. I have read the GS 1999 ...
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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 ...
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556 views

How sensitive are vertical spreads to changes in implied volatility?

How sensitive are vertical spreads to changes in volatility / implied volatility in the money, at the money, and out of the money? I'm thinking for 1 point spreads this would be very small / neutral ...
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654 views

What is the best method to compute project volatility in Real Option Valuation?

There are few methods like Copeland-Antikarov, Herath-Park, Cobb-Charnes etc. to compute project volatility, however these methods compute upward biased volatility. What is the best method I could ...
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140 views

Should we apply practical constraints on the distribution of monte carlo paths?

to limit interest rate paths to a 'reasonable' range (if we could define reasonable). Now we calibrate log-normal skew and mean reversion monthly to robust basket of atm swaptions and in and out ...
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841 views

Do low volatility stocks outperform high volatility stocks over the long run?

A recent article from Forbes seems to indicate that low volatility stocks outperform high volatility stocks over the long run. Does anyone have any supporting or contradicting evidence to this claim? ...
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171 views

How to derive this approximation of the risk-neutral expectation of the variance?

On the paper Bollerslev, Tauchen and Zhou (2009 RFS) the authors say about equation (15): The corresponding model implied risk-neutral conditional expectation ...
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963 views

How to avoid having 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. ...
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Constructing an approximation of the S&P 500 volatility smile with publicly available data

Besides of the VIX there is another vol datum publicly available for the S&P 500: the SKEW. Do you know a procedure with which one can extrapolate other implied vols of the S&P 500 smile with ...
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255 views

How to calculate volatility on intraday data?

I have several weeks of minute-by-minute stock data (start and end prices, volume). Everything I've read so far leads me to believe there isn't a standard method for volatility, which is leaving me ...
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183 views

How is implied volatility derived?

How to compute Implied Volatility Calculation? The above link shows that there multiple ways to calculate implied volatility. My question is that for most of the common data sources like Bloomberg, ...
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715 views

How to use a realized kernel?

I've read that realized kernels are the thing to use for calculating daily volatility from high-frequency data. So I've got minute data, how do I actually use such a kernel? Will it give me minute-ly ...
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284 views

Reference on Electronic volatility trading [duplicate]

Possible Duplicate: Looking for a recommendation for a real life volatily trading book. I recently came in contact with a quant desk that traded volatility. The discussion only highlited my ...
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511 views

Why are there so many different ways of calculating historical volatility

There appears to be several ways of calculating volatility: Price volatility (of which there are several variants): close to close high low range average of open, high, low and close Log returns ...
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131 views

Which volatility to use to price options on futures contract?

I have some questions regarding pricing futures options and I just want to be sure that my thoughts are correct. I am trying to price options on futures for american & european style. In the ...
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2k views

Regime-Switching Model for detecting market shifts

I'm always wondering whether anyone has utilized regime-switching models successfully in forecasting or trading. Academia has long discussed this topic in-depth, such as using Regime Switching ...
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1answer
2k 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 ...
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678 views

Construction of “vol of vol”

How do you construct something that lets you buy "vol of vol"? not necessarily for VIX, but any particular stock or index.
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VIX = Vega of S&P500 options?

ok, so let assume I can predict the daily change in the VIX itself (in points) every day. what would be the best way to play this with OPTIONS? well, obviously VIX options, but if I can look at the ...
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546 views

Tradable Volatility

VIX (spot) has very nice features, including mean reversion. We all know that we can't trade VIX (spot). The closest we can get is using front-month future contracts. The problem I have with that is ...
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How to derive appropriate volatility for a binary option (with strike/term) from market data?

I am valuing a binary FX option (european) with a defined strike and term (2Y). I'm using a closed form solution based on Black-Scholes framework. How can I derive the appropriate volatility to use ...
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115 views

Nested volatility

The introduction VIX options makes the concept of "volatility of volatility" a real life concept. The idea of "nested volatility" seems interesting, and I am wondering if there are any academic ...
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184 views

Model calibration to illiquid assets when pricing options with long maturities

Let us assume one is interested in pricing an option with a very long maturity (up to 20 or 30 years) on a liquid underlying. The market won't have liquid quotes for the higher maturities. Still you ...
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345 views

what's the relationship between forecasted stock volatility and implied volatility?(option)

what's the relationship between forecasted stock volatility and implied volatility? I know that implied volatility is the volatility calculated by BS formula, is there any relationship between implied ...
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How to normalize different instruments by volatility?

I'm trying to think on a way to normalize stocks to be on the same scale depending on their recent volatility. Is there some theoretical reference on the subject or and experience you can share?
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265 views

How to calibrate a volatility surface using SVI

I've read the following paper by Gatheral and Jacquier and have several question regarding the calibration of a volatility surface in a arbitrage free way and some theoretical aspects. Let me first ...
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1answer
2k views

Historical volatility from close prices (Haug pg 166)

I have implemented a function for calculating historical volatility using close the close method as described by Haug on page 166. When I implemented the formula given by Haug, it resulted in some ...
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615 views

What research is available on the performance of convertible bond arbitrage models?

The basic principles of convertible bond arbitrage have been clear at least since Thorp and Kassouf (1967). For those who are not familiar, the arbitrage entails purchasing a convertible bond and ...
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DCC GARCH - Specificating of ARCH and GARCH parameter Matrices STATA

The command in STATA to calculate the DCC model of two variables is: mgarch dcc ( x1 x2=, noconstant) , arch(1) garch(1) distribution(t) $$ \begin{bmatrix} ...