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

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Delta Neutral / Gamma Neutral Positions

I've been trying to find out more about options positions which are both delta neutral and gamma neutral--created with some kind of calendar spread. Supposedly, such a trade will be perfectly hedged ...
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3answers
1k 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 ...
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1answer
63 views

Effect of volatility on the delta of a call option

In the book 'Dynamic Hedging', Nassim Taleb writes: ...
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1answer
151 views

Swaptions vol trading lognormally

What does this mean: "Front-end vols have been trading lognormally while longer tails have traded normally." I read this in a research report, in the context of ...
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3answers
194 views

Why are short expiries associated with more pronounced volatility skews?

I've noticed that for a given strike price, the shorter expiration dates of options have more pronounced volatilities why is that?
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1answer
192 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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2answers
743 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 ...
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1answer
193 views

How to group mutual funds by volatility?

I want to group Mutual Funds by their volatility. Ideally, I would like to end up with the mutual funds beings attached to different groups: High volatility Medium volatility Low Volatility My ...
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1answer
163 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 ...
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1answer
154 views

Volatility of Futures

Apparently: Under a constant interest rate, the futures price is given by a deterministic time function times the asset price (I think I understand this). This means that the volatility of the ...
2
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1answer
453 views

How does Volatility Pairs Trading work?

I've read some material related to pairs trading for equities and I understand the process of finding non-stationary pairs price series that can be cointegrated to form a stationary series. The basic ...
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2answers
170 views

2 stocks, no shorting vs shorting. (concrete questions, mean-variance)

I'd appreciate help with the following questions. Suppose there are two stocks $A$ and $B$ with expected returns $E_A, E_B >0$ and volatilities $v_A, v_B >0$, respectively . Also, suppose ...
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1answer
242 views

Value at Risk from Delta of a single asset portfolio

I am trying to figure out the following, for me unfamiliar type of question: Given is a single asset portfolio: the Delta of the portfolio is 15, the value of the asset is 10 and the daily volatility ...
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2answers
124 views

What impact does arbitrage have on realised volatility estimates?

Doing some research modeling/estimating volatility in the bitcoin market. There is quite a bit of scope for arbitrage within crypto-currency markets. Wonder if this has any impact on my volatility ...
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2answers
240 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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1answer
61 views

Options on Volatility Control Index

I have two question. Does an option on volatility control index exist? If I google it, it seems like there is such an option, but I can't find the option on any of exchanges. So this is my first ...
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1answer
99 views

How to use calibrated Standard Stochastic Volatility?

I'm considering the standard stochastic volatility model: $$x_t = \rho x_{t-1} + \sigma \epsilon_x$$ $$y_t = \beta \exp\left[ \frac{x_t}{2} \right] \epsilon_y$$ where $y_t$ is the log-returns and ...
2
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1answer
54 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? ...
2
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1answer
109 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 ...
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2answers
63 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 ...
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3answers
3k views

Relationship between Beta and Standard Deviation

I was doing some financial analysis on two firms in the coffee industry. After calculating Beta and Standard Deviation for both firms, I seem to have stumbled on some weird phenomenon. It appears ...
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2answers
213 views

Is there a way to adjust R PerformanceAnalytics function VaR with EWMA or GARCH method?

Is there a way to upgrade R PerformanceAnalytics function VaR with more risk sensitive approaches like EWMA or GARCH? Or is there another R package which can handle the issue?
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2answers
256 views

How to classify stocks by their volatility?

I would like to hear other possible ways of classifying Stocks by the Volatility of their returns. Assuming that I want to characterize each stock as Low, Medium or High Volatility Stock and assuming ...
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2answers
442 views

How to calculate the volatility matrix with multiple stocks

calculating the volatility for a single stock is straightforward. However, I'm not sure whether my approach for calculating the volatility matrix for multiple stocks is correct: I assume a log-normal ...
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1answer
145 views

Asset volatility in Merton model

I am currently working on my thesis where I discuss the Merton default probability model. I have a huge sample of US firms for the period 1990-2010. I use both numerical and complex iterative approach ...
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1answer
214 views

Square-root-of-time and autocorrelation

My question is that when we have autocorrelation in daily volatilities can we scale daily volatility to annual basis using square-root-of-time rule? Does it breach the main assumption of the rule ...
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1answer
227 views

How to compare different volatility measures?

I read the Euan Sinclair's book (Volatility trading) in which he suggests different volatility estimators (Close-to-close, Parkinson, Garman-Klass, ...). I am inquiring about what is the best stock ...
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1answer
118 views

Is the volatility of a trader's wealth equal to the volatility of the underlying assets traded?

Assume that a trader trades in several stocks with different volatilities. The return of the trader's portfolio would be the weighted average of returns and the risk would be a function of the the ...
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1answer
151 views

evaluation of volatility models using loss functions

This question has two parts, What is the state of the art in an academic or public knowledge sense of volatility forecast model evaluation? Since there are many methods out in the wild, and do ...
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1answer
272 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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3answers
480 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
889 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? ...
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1answer
188 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 ...
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48 views

How to compute/find the volatility of an index like the S&P 500 to be used to control risk exposure? [closed]

I've asked two related questions. First this one on the money stack exchange and this one on the math stack exchange. But have not yet found a complete answer. Given an index such as the S&P ...
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33 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 ...
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1answer
105 views

How to get around flat likelihood function when calibrating GBM parameters

(Hope this is the correct place for this question - I posted it first on stackoverflow:) I want to calibrate jointly the drift mu and volatility sigma of a geometric brownian motion, ...
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0answers
45 views

Testing for the presence of a positive or negative gamma effect

I am currently analyzing a statistic that I believe will have the effect of hedgers having a positive or negative gamma position in certain stocks. In the case where I believe hedgers have positive ...
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0answers
90 views

Derivation of variance of Zhou (1996) volatility estimator

Does anyone know how to derive the Variance of Bin Zhou's volatility estimator (Theorem 1) in 'High-Frequency Data and Volatility in Foreign-Exchange Rates' (1996) Zhou 1996 Any help would be ...
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0answers
186 views

Reasoning for Bloomberg's short rate volatilty calculation

Bloomberg, in its documentation, explains that it calculates the short rate volatility for its Hull White implementation by multiplying the e.g. 10y IRS rate (divided by 100) by the 10y cap vol. Why? ...
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0answers
199 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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0answers
509 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 ...
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0answers
405 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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0answers
79 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?
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0answers
68 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 ...
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2answers
95 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 ...
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1answer
99 views

Mean reversion time estimation

I am new to mean reversion trading, and I would like to get some good references about how to estimate the time it takes to a mean reverting process to cross its long term mean.
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3answers
123 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 ...
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1answer
439 views

Probability of stock closing over a certain price

A stock has beta of 2.0 and stock specific daily volatility of 0.02. Suppose that yesterday's closing price was 100 and today the market goes up by 1%. What's the probability of today's closing price ...
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2answers
728 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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1answer
81 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: ...