# Tagged Questions

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

311 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 ...
5k views

### 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 ...
110 views

### What is the rationale behind using SV models with 2 distinct volatility processes?

In the Double Heston model, there are 2 distinct volatility processes. The SDEs read \begin{align} & d{{S}_{t}}=r{{S}_{t}}dt+\sqrt{{{v}_{1}}(t)}{{S}_{t}}d{{W}_{1}}(t)+\sqrt{{{v}_{2}}(t)}{{S}_{t}}...
512 views

### When gains are made: Overnight or during trading hours? What is the connection to volatility?

Falkenblog reports an interesting finding: All of the stock returns since 1993 are from overnight returns and cross-sectionally, volatility receives a positive overnight risk premium, a negative ...
88 views

### Approximation of an option price

The value of an option in the money is 11.50 Euros. The parameters of the market are: -The price of the underlying stock: 81.4 Euros. -The volatility ofthe underlying is : 34.65 % The ...
178 views

### economic facts that causes the financial time series to be heavy tailed

When reading a tutorail on extreme value theory, I once meet the following claim ...
195 views

### What return equation is Engle referring to in his Nobel lecture?

Engle comments in "Risk and Volatility: Econometric models and Financial Practice" that If the price of risk were constant over time, then rising conditional variances would translate linearly ...
114 views

### Time-Varying Volatility and Conditional Likelihood

Engle's comment in his seminal paper "Risk and Volatility: Econometric models and Financial Practice" mentions that I had recently worked extensively with the Kalman Filter and knew that a ...
338 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 ...
716 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 ...
227 views

### Intuitively speaking, why do at the money options have no volga/convexity?

I was wondering if someone could give me an intuitive explanation as to why the vega of at the money options doesn't increase with volatility. I've seen some mathematical explanations showing the ...
832 views

### how do we know if the volatility which is quoted in market is Normal (Bachelier model) or log normal (Black 76)?

in market, many instruments are quoted in volatility, but how we can tell what kind of volatility is this? is it normal volatility, or lognormal volatility. because it affect our hedging positions so ...
225 views

### Could we estimate a portfolio's volatility using a GARCH on the portfolio returns?

Estimating the volatility of a portfolio is typically done by first estimating the covariance matrix. This, however, can be difficult to do accurately and predictivly. This paper gives a nice summary ...
630 views

### How to compare volatility models?

What are the most popular ways to compare volatility models? Suppose I wanted to compare the forecasting accuracy of a GARCH(1,1) model with the historic 30 day volatility. What method should I use?
90 views

### How to transform Ornstein-Uhlenbeck parameters from hourly to daily?

I get the parameters (long-term mean, volatility, mean-reversion speed, correlation) of two correlated Ornstein-Uhlenbeck processes via a likelihood estimation from hourly data. If I want to transform ...
177 views

### Find call and put volatilities using ATM, Risk reversal and Butterflies volatilities

I have to plot the implied volatility surface for EUR/USD. So, my goal is to produce something like that, from put delta 10 to call delta 10: Searching for informations, I found that I could find ...
194 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 $Z_t$ ...
134 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 ...
146 views

### Approximation of different volatilities

Suppose I model the forward swap rate lognormal $$dS_t = \sigma_{ln}S_tdW_t$$ On the other hand we could model it simply by a normal assumption: $$dS_t = \sigma_{n}dW_t$$ I would like to know if ...
182 views

103 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 ...
739 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 ...
304 views

### Measuring unbiased estimator for variance with RMSE?

The root mean squared error (RMSE) is considered by some to be the best measure of how good a variance estimate is. You often see it quoted as: \$RMSE=\sqrt{\frac{1}{n}\sum_{i=1}^n(\hat{\sigma_i} - \...
479 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?
132 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 ...
340 views

### How to adapt a Moving Average period to market conditions?

I would like to know if there is some way to adapt the period of a moving average to market conditions like for instance the stop loss can be adapted to market conditions using the average true range. ...
50 views

### Why would one prefer variance swaps over other instruments?

I understand that an investor who has a view on an underlying's variance would be tempted by a variance swap. But why would one prefer such a contract over another instrument whose value is based on ...
3k 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 ...