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

learn more… | top users | synonyms

4
votes
3answers
332 views

Negative high frequency intraday volatility - Zhou estimator

To estimate high frequency tick data stock intraday volatility, I have read Robert Almgren's notes7.pdf http://www.cims.nyu.edu/~almgren/timeseries/notes7.pdf where he talks about the bias free ...
2
votes
1answer
185 views

High frequency price forecast model ARMA GARCH or another?

Can you reccomend model for high frequency data (1 second and less) (returns and volatility forecasting)? Most papers use ARMA, GARCH etc in 1 minute and lower time frame. PROBLEM ARMA does not know ...
1
vote
2answers
164 views

A good way to calculate the realised daily volatility

Currently, I am confused about the calculation of realised daily volatility. Assume I have daily returns, for example, FTSE, then I need to estimate the daily realised volatility. I read some ...
0
votes
1answer
78 views

Volume or Volatility?

I've recently been given a project which came with some documentation. In this documentation is a bullet point that reads: Liquidity Risk in Equity, Credit and Vol I'm unsure as to whether vol is ...
0
votes
0answers
66 views

Cointegration and variance of time series

Given that $X_t , Y_t$ are two cointegrated random processes, what can we say about the relationship between variance of the two increments $var(X_{t+h}-X_t)$ , $var(Y_{t+h}-Y_t)$ for a given ...
0
votes
2answers
86 views

Short Volatility [closed]

Being net short options is an obvious case of being short volatility. But what other investments are "functionally" short volatility? Is long equities long or short volatility? Is short Apple long or ...
1
vote
3answers
132 views

Direct use of implied volatility

I am not sure to understand exactly the direct use of implied volatility. Let's take an example: if an instrument has a daily volatility of $\sigma$, there is a 68% probability that its value will be ...
4
votes
1answer
431 views

Moving window forecasting in Python

I am looking to create some code that will out-of-sample forecast the HAR-RV model. The model itself is formulated as the following, and the betas are estimated through HAC-OLS or Newey-West. ...
2
votes
1answer
62 views

Solving a Non-Linear PDE using a Finite Difference Scheme

I have the following non-linear PDE and I have no idea how to go about solving it using a finite difference scheme in Python. Can someone get me started and/or point me to an algorithm for doing this? ...
0
votes
0answers
84 views

variance ratio for pair-trading

I am using the variance ratio test to check whether my sequence is mean reverting in that test there is a parameter n, How in general I choose this n? or what is the meaning of this parameter? ...
2
votes
0answers
69 views

How to calibrate volatility surface for Interest Rate Cap&Floor pricing

I'm using Black model to do interest rate Cap & Floor pricing. The volatility is determined by using the bootstrapping methodology. However, afterwards, how should I do the calibration, or ...
2
votes
1answer
159 views

On an application of Ito's lemma

Assume that instantaneous returns are generated by the continuous time martingale: $$dp_t = \sigma_t dW_t$$ where $W_t$ denotes a standard Weiner process and One day returns are denoted by $r_{t+1} ...
1
vote
0answers
51 views

Hedge volatility decreases

My particular options positions are typically a long delta, and long vega. Decreases in implied volatility, or specifically the VIX, can drastically alter the profitability of my position. Is there a ...
1
vote
2answers
84 views

Garch for covariance matrix?

I have seen plenty of literature about GARCH on estimation volatility. how about covariance? There are plenty of risk models depending on the covariance matrix. I guess we can assume the correlation ...
5
votes
0answers
120 views

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} ...
1
vote
1answer
62 views

Variance Swap volatility

In an article, it is mentioned that a parameter is "the variance swap volatility at time t". I know what a variance swap is but I don't know what they could mean by "variance swap volatility". ...
2
votes
1answer
384 views

using garch to forecast volatility but getting low persistence model

I am using a GARCH(1, 1) model to try model volatility for a certain stock. I have a GARCH function in matlab that returns the three parameters, omega, alpha & beta. I then use this parameters ...
1
vote
2answers
153 views

How to write a home task report which is part of the interview process for a quant position in a trading firm

I recently appeared in an interview for a quant research post in a trading company. As part of the interview, I was given a home-task to solve in a week. The inerviewer gave me a dataset consisting of ...
0
votes
0answers
126 views

SRRI calculation for absolute return funds

I am trying to understand the formula for calculating SRRI for absolute return funds described in ESMA's guideline CESR/10-673, and Richard's answer has been of great help (What does this formula (to ...
1
vote
1answer
153 views

What is an appropriate algorithm to use for tax loss harvesting?

I've been reading into how Betterment and Wealthfront have architected their tax loss harvesting algorithms, but they stop short of providing any real examples. Essentially, they both reduce to: ...
4
votes
1answer
480 views

How to calculate implied volatility smile of basket using correlations?

For a basket, the realized volatility can be calculated using: $$\sqrt{\sigma_1^2 + \sigma_2^2 + 2 \sigma_1 \sigma_2 \rho}$$ If I have the volatility surface of two underlyings S1,S2 (strike space). ...
0
votes
0answers
40 views

Correction factors for volatilities of smoothed returns

In An Introduction to High Frequency Finance (http://www.amazon.ca/Introduction-High-Frequency-Finance-Ramazan-Gen%C3%A7ay/dp/0122796713), the authors (on page 253) build a tick-frequency volatility ...
4
votes
1answer
124 views

Question about historical volatility ranking

I have seen this strategy example, which uses garch in a regime switching context: https://systematicinvestor.wordpress.com/2012/01/06/trading-using-garch-volatility-forecast/ The author classifies ...
11
votes
1answer
2k views

Correctly applying GARCH in Python

Problem: Correct usage of GARCH(1,1) Aim of research: Forecasting volatility/variance. Tools used: Python Instrument: SPX (specifically adjusted close prices) Reference material: On Estimation of ...
1
vote
0answers
37 views

Reputational Harm

How would you measure the reputational harm incurred on an individual by an organization. How is Market Pricing in the expected payout resulting from the law suit by an individual ? The news breaks ...
6
votes
3answers
385 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 ...
1
vote
0answers
129 views

How to hedge a long stock with the corresponding volatility ETF

Let us say I want to establish a market neutral position. So if I buy 50 shares of stock (SPY) and I want to delta hedge, I sell an ATM covered call. So that brings the position delta to 0. Now, I ...
0
votes
0answers
111 views

How to calculate probability of option expiring in the money?

Given the following values ...
3
votes
2answers
172 views

How to get around flat likelihood function when calibrating GBM parameters?

I want to calibrate jointly the drift mu and volatility sigma of a geometric brownian motion, $$\log(S_t) = \log(S_{t-1}) + (\mu - 0.5*\sigma^2) \Delta t + \sigma*\sqrt{\Delta t}*Z_t$$ where $Z_t$ ...
1
vote
1answer
99 views

European vanilla call/put option, when volatility increases, how will gamma changes?

according to the BS formula, $\gamma = \frac{N'(d_1)}{S_0\sigma\sqrt{T}}$, gamma will decrease when volatility increase. How does it intuitively make sense? rather than from the formula.
3
votes
0answers
200 views

Constructing Volatility Smile from American Options

My question is about best practices for reconstructing volatility smiles for a fixed tenor from American option data. For simplicity/liquidity, I am currently considering options on SPY. I am ...
1
vote
1answer
492 views

Bloomberg equity option volatility data

Using the Bloomberg open API, I am trying to program a C++ script that is able to download option volatility data from Bloomberg. I currently do not have access to Bloomberg, but in the coming week I ...
2
votes
1answer
130 views

Volatility Surface Constituents, do's and dont's

Recently I have been working a lot with implied volatility and volatility surfaces. The basic idea is easy to follow: 1) Gather market prices of options at different (Strike,Expiry) 2) Calculate ...
1
vote
2answers
346 views

Why is the vega of an at the money option so insensitive to movements in volatility? I.e, why do ATM options have such little Vomma?

I've been trying to understand why at the money options have very little vomma. I was reading and came across a graph that showed vega as volatility changes and I couldn't grasp how the relationships ...
5
votes
1answer
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 ...
4
votes
2answers
160 views

Time-independent local volatility

Suppose somebody provides us with a surface of European call prices $C(\tau,K)$ where $\tau$ stands for time-to-maturity and $K$ for the strike. By Dupire's results, there is a unique local volatility ...
6
votes
3answers
2k 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 ...
0
votes
1answer
143 views

What are the parameters of the function PORTVAR in Matlab?

According to the Matlab help, Portvar will give the "Variance for portfolio of assets" by entering the returns of the Assets and the corresponding weight. However, it does not explain the parameters ...
3
votes
1answer
130 views

Volatility updating rule using r

I'm trying to program a volatility updating rule using iteration. I start with the well know Heston-Nandi model where the returns dynamics are : with is iid standard normal randome variable, where ...
0
votes
2answers
114 views

Comparing Portfolio Volatility with Index Volatility seems a wrong method?

thanks for looking into this question. I am comparing an investment strategy against the S&P 500 for a financial article I'm writing. I compute volatility of the Portfolio in this way, as the ...
0
votes
1answer
94 views

I have volatility of a portfolio in year 1 and in year 2. How do I calculate the volatility over the total 2-year period?

thanks for looking into this question. See the picture below (better is right-mousebutton - open in new tab). I also have the price and return data of the Stocks if that's needed to calculate the ...
2
votes
2answers
74 views

I have portfolio volatility for year 1 and for year 2. What is portfolio volatility for year 1 and 2 combined?

Thanks for looking into this question. Portfolio volatility in year 1 = 15%. Portfolio volatility in year 2 = 20%. What is the portfolio volatility over the timespan year 1 and 2 combined? Is it ...
0
votes
2answers
99 views

I have portfolio volatility for individual years, can I use them to compute portfolio volatiltiy for subperiods?

Thanks for opening this question. I have constructed some rules for a portfolio with annual rebalancing and am backtesting it for the period 1990-2014. I want to compare the risk-adjusted return to ...
0
votes
1answer
34 views

Transaction Costs Measure ATOP: What does it mean and exactly measure?

I went through some presentations about LowVol strategies for some indices. In the presentations were tables with average returns, vola, Sharp ratio and ATOP. I have no clue what this ATOP is supposed ...
2
votes
1answer
226 views

Some questions about implied volatilities and how to generate theoretical prices when market prices are not available

I am building a little Excel file that take some option prices in input and plots the volatility smile/surface. I have a script that reads market prices from the option chain for 3 different ...
0
votes
1answer
91 views

How do I track implied volatility of specific delta?

I'm a newbie with respects to volatility trading and options. I recently purchased a book on the topic called "Trading Implied Volatility -An introduction" by Simon Gleadall. It's been one of the most ...
1
vote
1answer
160 views

Arrow-Debreu Price in “The Volatility Smile and its implied Tree”

I was reading the old, but still interesting paper "The volatility smile and its implied tree" by Derman and Kani. I have a two questions about the derivation of the $2n+1$ equations, both of them ...
7
votes
5answers
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 ...
6
votes
2answers
257 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 ...
1
vote
2answers
173 views

what volatility do we calculate using GARCH model

what volatility do we calculate using GARCH model, Historical vol or Implied vol or Future Vol or Actual vol.