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

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8
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2answers
639 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 ...
7
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1answer
1k 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 ...
4
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1answer
369 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 ...
2
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2answers
285 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.
1
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0answers
78 views

How to trade risk-adjusted returns?

Why does dividing daily returns by daily range eliminates fat tails and results in an (almost) gaussian distribution? And how could that distribution be exploited to enter trades?
2
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3answers
794 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 ...
4
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0answers
138 views

Rolling window Kendall's tau against APARCH(1,1) correlation

Assume you want to forecast the correlation matrix of a stocks' basket (say 15 ~ 20 stocks from different sectors); assume you need to forecast at $T$ days because you will use the forecast ouput with ...
1
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1answer
320 views

Unsystematic/Idiosyncratic/Firm-specific volatility/variance in the market model?

I was asked to use idiosyncratic volatility as a regressor in a cross-sectional regression upon cross-sectional returns as the dependent variable. Returns can be thought of as the raw log stock return ...
1
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1answer
914 views

What does this formula (to derive annualized volatility from VaR) mean?

I'm faced with the formula shown in the image below, which I just don't understand, in part because I've no grounding in stats, and in part because I don't even understand the notation: What's ...
1
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2answers
392 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
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2answers
973 views

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 ...
1
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1answer
128 views

Brent Crude Data

I am trying to locate historical volatility data (5+ years) for Brent Crude? Does anyone know where I might be able to source such data?
3
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2answers
383 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 ...
4
votes
3answers
1k views

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?
3
votes
1answer
129 views

market completion under stochastic volatility model

Consider a stochastic volatility model. As there are two sources of risk and one asset only, this is an incomplete market. One can complete the market by considering a derivative V1 used to hedge the ...
7
votes
2answers
270 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 ...
3
votes
1answer
611 views

Science behind options pricing into Earnings event

I am wondering about studies regarding the uncanny options pricing into public company's earnings reports. The phenomenon being that the price of a straddle before earnings costs near exactly the ...
6
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0answers
1k views

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 ...
10
votes
1answer
354 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 ...
6
votes
3answers
2k 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 ...
1
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1answer
322 views

Calculate historical (ATM) option prices with public data

I just saw the question How to calculate the most realistic historical option prices with additional publicly available parameters and I am interested in the step before that. How can I calculate ...
1
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1answer
582 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 ...
3
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2answers
2k views

GJR-GARCH Model In R

Any idea how to estimate GJR-GARCH models in R? Is there any particular library like fGarch that supports such models?
4
votes
1answer
271 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 ...
4
votes
1answer
645 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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0answers
540 views

Using volatility cycles to switch between trend following & range bound trading? [closed]

"...a low volatility environment is usually a good environment for trend following strategies; see Jez Liberty’s state of trend following report here..." ...
10
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2answers
414 views

Exploiting breakdowns in correlation of estimated volatility

In the attached image I have a plot of the rolling correlation of 90-day historic volatility (using the Garman Klass estimator based on Sinclair's Volatility Trading) of JPM v. the S&P. As can be ...
3
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0answers
312 views

Real time stock volatility

Is there any need for real time weighted volatility on a tick by tick basis for equities? If you had that access to that, what could you do with it?
6
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3answers
228 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 ...
3
votes
1answer
236 views

Does the correlation amongst stocks rise when stock values decline?

Is there any research on whether the correlations among stocks rise when stock indices decline? Which model could account and test for that effect ? Maybe GARCH-BEKK, or some models using copulas?
3
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3answers
206 views

Why in general is the variance of volume changes higher than variance of price changes?

Why, in general, is the variance of volume changes higher than variance of price changes? I understand that these two quantities are functions of some very different factors, but I don't understand ...
8
votes
2answers
784 views

Analytical relationship between a covariance matrix and cross-sectional dispersion

Given an expected returns vector and a covariance matrix, one can perform a joint draw and measure the average cross-sectional variation as the standard deviation across returns for a particular joint ...
12
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2answers
2k views

statistical arbitrage option overlay strategies / volatility trading

Here's an interesting trading puzzle that I would love to get the community's input on. Let's say there exists an alpha signal that does a good job of sorting equities expected excess returns over ...
5
votes
2answers
990 views

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 ...
4
votes
2answers
555 views

SKEW and VIX relations?

My question is about the CBOE published index VIX and SKEW. To start with, I consider working on the variance dynamics. I calibrate the market data (such as VIX and VIX futures) into the Heston ...
3
votes
1answer
260 views

How to use volatility to assess the accuracy of a stock market model?

Background: For a dissertation I have a multi-agent stock market model that I am using to assess different mechanisms for producing particular dynamic regimes. A key point is assessing how closely it ...
5
votes
1answer
439 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 ...
6
votes
1answer
138 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 ...
9
votes
1answer
558 views

One dimensional analog of cleansing a correlation matrix via random matrix theory

The general idea of cleansing a correlation matrix via random matrix theory is to compare its eigenvalues to that of a random one to see which parts of it are beyond normal randomness. These are then ...
3
votes
0answers
123 views

What is the relation between return volatility and return rank volatility, and how can I control the latter?

I have no experience in finance, but I've been playing around with a virtual portfolio. I'm trying to control the "rank volatility" distribution - that is, the volatility of a stock's daily rank in ...
9
votes
1answer
405 views

How do you estimate the volatility of a sample when points are irregularly spaced?

I was looking again at this question which basically haunts every quant I believe, and I was thinking about the effect of these gaps when computing volatility of the series. Let's define the problem ...
6
votes
6answers
9k 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 ...
6
votes
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 ...
2
votes
0answers
67 views

What models for backing out Equity IVOL [duplicate]

Possible Duplicate: How should I calculate the implied volatility of an American option in a real-time production environment? I am starting a project and would be grateful for some ...
6
votes
1answer
388 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 ...
11
votes
5answers
3k 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 ...
7
votes
2answers
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 ...
9
votes
1answer
320 views

What are the major characteristics of natural gas volatility and options?

Seasonality is a big deal in the natural gas markets. My understanding is that they are broadly divided into summer and winter, with seasonality in both price and the volatility. What does this ...
11
votes
2answers
768 views

How to forecast expected volatility from high-frequency equity panel data?

I'm wading through the vast sea of literature on realized volatility estimation and expected volatility forecasting (see, e.g. Realized Volatility by Andersen and Benzoni, which cites 120 other ...
9
votes
1answer
529 views

Can VIX be interpreted as a proxy for instantaneous volatility?

BJO06 (Table 2) estimate the following Cox-Ingersoll-Ross model for market variance, $\sigma^2_t$: $\mathrm{d}\sigma^2_t = (\alpha_0 + \alpha_1\sigma^2_t)\mathrm{d}t + ...