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

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relation between asset's and equity volatilities - merton model

In terms of Merton credit risk model need to find the initial value of counterparty's assets and the volatility of the assets. Both value are not directly observable thus we have to approximate them ...
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2answers
211 views

Electricity volatility smile

In the electricity sector, what should be the shape of the volatility smile? a behavior similar to other commodities with a convex curve, decreasing first and then growing to the initial level. or ...
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27 views

explanation for preference of volatilities in option premium quotes [duplicate]

could any one suggest an explanation for why premium in option markets (currency or otherwise) are quoted as volatilities rather than (premium/abs(spot price - settlement price)) or some other ...
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2answers
2k views

How to annualize intra-day volatility on minute data?

I am trying to convert minute based volatility into annualized volatility in such a way that both are comparable. $Vol_{min} * \sqrt(t)$ does not seam to get them into the same scale if I annualize ...
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2answers
540 views

Extensions of Black-Scholes model

For the Black-Scholes model my feeling is that the volatility parameter is like sweeping stuff under the rug. Are there models which improve on the volatility aspect of Black-Scholes by adding other ...
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3answers
694 views

How to calculate return rates with negative prices?

I'm dealing with electricity options and I'm considering the possibilty of negative prices. I want two estimate the historic volatility. However, an arithmetic mean doesn't feel appropriate and ...
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2answers
272 views

how to calculate more efficient volatility figure than historical volatility?

can we use alpha value to calculate option price instead of historical volatility. And if we can please explain how. I am doing my MMS in Finance and this for a project i am doing. the project is ...
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2answers
2k views

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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4answers
2k views

How to calculate the implied volatility using the binomial options pricing model

I want to calculate IV for american options with dividends. So far I have found algorithms to calculate the option price given a volatility. Please can you point me to paper or implementation (R, ...
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1answer
720 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 ...
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1answer
242 views

Volatility Estimation

Let say I ran two strategies and got its weights at each rebalance and equity curves. I would like to combine these systems to get the performance if I were to trade them concurrently from a portfolio ...
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0answers
441 views

Risk Budgets with Target Portfolio Volatility

I'm working through the implementation of a risk budgeting approach as described in the recent Roncalli paper. The idea is that the portfolio manager sets a contribution of total portfolio volatility ...
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1answer
197 views

Which prices to use to compute realized volatility?

For computation of realized volatility, especially range based volatility, deal prices are commonly used. If Level I data available should the deals data still be used or another measures of spot ...
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1answer
762 views

So many volatility models. Any comparisons of them?

Are there any papers that make an explicit contrast/comparison of the following (or other) vol models in terms of the suitability for addressing some empirical problem? Wavelet multiresolution ...
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4answers
9k views

Why are GARCH models used to forecast volatility if residuals are often correlated?

The answers to this question on forecast assessment suggest that if the sequence of residuals from the forecast are not properly independent, then the model is missing something and further changes ...
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2answers
433 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? ...
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2answers
224 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 ...
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0answers
81 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 ...
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2answers
258 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 ...
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2answers
551 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 ...
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2answers
378 views

What is the instantaneous P&L of a Variance Swap?

What is the instantaneous P&L of a variance swap. Is it $(\sigma^{2}_{t}-\sigma^{2}_{implied})dt$?
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3answers
1k 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 ...
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2answers
377 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: ...
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2answers
267 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 ...
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2answers
3k 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 ...
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4answers
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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 ...
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180 views

Fitting a non linear AR + GARCH(1,1)-M model

I want to fit the following model to a time series: $$ y_{t}=\alpha_{0}+\alpha_{1}y_{t-1}+\alpha_{2}y_{t-1}^{2}+\lambda h_{t}+\varepsilon_{t} $$ $$ ...
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1answer
423 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 ...
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158 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 ...
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1answer
194 views

compute FX forward from broker's data

assume I have following delta-term vol data from broker: ...
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1answer
168 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 ...
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3answers
333 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 ...
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1answer
1k 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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2answers
2k 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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1answer
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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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345 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 ...
2
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1answer
145 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 ...
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1answer
594 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
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1answer
175 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 ...
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1answer
364 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 ...
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2answers
622 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 ...
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3answers
421 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. ...
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4answers
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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 ...
2
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2answers
622 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 ...
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1answer
104 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 ...
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0answers
297 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, ...
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1k 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
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1answer
1k 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 ...
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0answers
274 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 ...
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526 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 ...