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

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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 ...
0
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1answer
51 views
4
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2answers
199 views

Is there a better way to price options than with historical volatility?

I know that annualized historical volatility calculated with closing prices is a much rougher estimate than implied volatility for the correct "volatility" parameter in options pricing models. ...
1
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1answer
52 views

Risk-free arbitrage given a volume oracle?

Given a magical oracle who can correctly predict the volume, but not the price, of a given security, does there exist a risk-free arbitrage to capitalize on this information?
0
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1answer
46 views

Normal vol - convention

apologies for the simplicity of the question, but I was wondering: what is the quoting convention for normal (bps) volatility? Say I have the following time series of data: Date Close Abs Change ...
0
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3answers
116 views

What makes investors risk averse?

There are some regularly-occuring events that coincide with a rise in the implied volatility of an asset. For example, in advance of an firm's annual earnings report, it is typically expensive to buy ...
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4answers
1k views

How to avoid having 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. ...
1
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1answer
98 views

Where can I find a list of market-moving news announcements for different asset classes?

Different asset classes have different important news announcements that move the markets intraday. For instance, oil volatility increases after the EIA Petroleum Status Report, but that announcement ...
3
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2answers
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 ...
2
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1answer
707 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 ...
3
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2answers
179 views

Cross-sectional volatility vs temporal volatility

Volatility is usually defined as the standard deviation of returns, but sometimes it is calculated as the standard deviation of cross-sectional return divided by the square root of time, where other ...
8
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3answers
3k views

Gamma vs. Volatility Risk

Original Question: What is the link between Gamma and the Volatility Risk? It leads me to ask: - What is the Volatility Risk definition and what are the good practices to measure it? Thinking about ...
0
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1answer
173 views

Constructing Volatility Smile from Implied Volatility & Delta

I have implied volatility data for call and put options (expiring in 1 month from any given date) for a particular stock. In addition, I have the delta for the options. However, I have no information ...
0
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0answers
109 views

Fixed volatility portfolio with max returns creates skewed results

I am trying to create a portfolio of only four components using the mean-variance optimization (MVO). I am setting up my problem such that I want to maximize the expected returns with a fixed vol ...
2
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2answers
276 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 ...
5
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1answer
119 views

Nested volatility

The introduction VIX options makes the concept of "volatility of volatility" a real life concept. The idea of "nested volatility" seems interesting, and I am wondering if there are any academic ...
2
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1answer
159 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 ...
1
vote
1answer
1k 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 ...
2
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0answers
58 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 ...
7
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2answers
302 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 ...
1
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0answers
211 views

Models for volatility estimation of high frequency data?

I have read on several news articles and research papers, "Contrary to popular belief, high frequency trading reduces volatility in stock markets rather than exacerbates it". Do you know the models ...
10
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2answers
445 views

How to estimate the following model?

Suppose I have the following model: $$r_t=\sigma_t * \epsilon_t$$ where $r_t$ is the return at time t, $\sigma_t$ is the volatility, the model used to model this volatility is an exponentially ...
4
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2answers
169 views

Understanding the conditioning in a GARCH process

In a GARCH model like the following $$y_t=\sigma_tz_t,\\ \sigma_t^2=\omega(1-\alpha-\beta)+\alpha y_{t-1}^2+\beta \sigma_{t-1}^2$$ where $z_t$ is assumed to be iidN(0,1), we say that conditional on ...
2
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2answers
185 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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0answers
69 views

robust regions in grid search

I have a strategy f that takes parameters x,y (for x,y taking values in integer ranges). I get two grids (of returns and volatility values) from computing f(xi,yi) for integer ranges x1 <= xi <= ...
19
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3answers
3k views

How to forecast volatility using high-frequency data?

There is a large literature covering volatility forecasts with high-frequency tick data. Much of this has surrounded the concept of "realized volatility", such as: "Realized Volatility and ...
0
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1answer
38 views

Common point between IR and Vol option pricing models?

What is the common point between pricing models on options on Interest Rates and options on Volatility?
3
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5answers
176 views
6
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1answer
2k views

Regime-Switching Model for detecting market shifts

I'm always wondering whether anyone has utilized regime-switching models successfully in forecasting or trading. Academia has long discussed this topic in-depth, such as using Regime Switching ...
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2answers
657 views

Beta of FTSE100 stocks against benchmark index FTSE100

first post so if I write something silly don't hold it against me. I calculated beta for almost all the stocks that compose the FTSE100. All have beta < 1. This, as far as I understand it, means ...
2
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1answer
248 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 ...
0
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1answer
458 views

Controling ex-post volatility by ex-ante limits

In the context of mutual funds the KID directive forces us to calculate 5 year ex-post volatility of a (market) fund (weekly returns). Thus each week we look back in the past and calculate volatility ...
10
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3answers
3k views

How does volatility affect the price of binary options?

In theory, how should volatility affect the price of a binary option? A typical out the money option has more extrinsic value and therefore volatility plays a much more noticeable factor. Now let's ...
4
votes
1answer
797 views

Why parameterize the Black Scholes implied volatility surface?

I know that SVI volatility surfaces are very popular among financial practitioners. I understand that this is not really a model for some underlying asset (such as Black Scholes, Heston etc.) but ...
1
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2answers
119 views

Standard Deviation as listed in Rebonato's Volatility and Correlation: Binomial Replication 2.3.4 Worked-Out Example

I am reading Rebonato's Volatility and Correlation (2nd Edition) and I think it's a great book. I'm having difficulty trying to derive a formula he used that he described as the expression for ...
3
votes
2answers
515 views

SABR model inconsistent with Black Swaption Pricing

I am confused on the following: When we price swaption, the market convention is to use Black's Model which assumes forward swap rate is following Black's model under the Q(t) measure. When we tries ...
5
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0answers
200 views

Calculating volatility of inhomogeneous time series

I am reading an article by Zumbach and Müller whose name is Operators on Inhomogeneous Time Series. This is interesting in general, but my main goal is to learn a good and efficient method to ...
1
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1answer
354 views

Interpolation of volatility curve for Swaption

I have found volatility in the black model for swaption for different maturity (1-2-3-6-9M, 1Y, 18M, 2-10Y, 15-20-25-30Y) and Tenor (1-10Y, 15-20-25-30Y). Now I need another values (Maturity: 2, ...
11
votes
2answers
612 views

Relationship between Large Cap and Small Cap Volatility

Relative value of large cap volatility. We all track the VIX as a measure of volatility, but we often forget that the VIX is volatility indicator for the large cap index within the SP500. We can ...
1
vote
1answer
121 views

Volatility of Option

I hope I'm asking this at the right place. This pertains to actuarial exam MFE/3F on Financial Economics. If $\sigma$ is "volatility" and $\Omega$ the elasticity of the stock, one formula that is ...
4
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1answer
2k views

What exactly is the OIS Black VOL?

While poking around in Bloomberg I stumbled upon the following data set: EUR SWPT BVOL OIS for various maturities. Obviously OIS must suggest OIS-discounting but how is it related to the ...
2
votes
1answer
3k views

What is the equation for Garman-Klass volatility?

I want to calculate realized/historical volatility for the underlying products of various options using the Garman-Klass estimator, but I can't see to find an equation, although I know it involves ...
0
votes
1answer
149 views

Where can I find historical data for volatility estimation?

I'm trying to estimate volatility following Shreve book, so I need observations of $f(t_j,t_j+\tau_k)$ and $f(t_j+\delta,t_j+\tau_k)$, where $t_J<t_{J-1}<\dots<0$ and $\tau_k$ are relative ...
2
votes
1answer
283 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 ...
1
vote
3answers
199 views

What does “true”volatility mean in volatility comparison?

In Sinclair's book, wee need to compare standard deviation with "true volatility" to check the power of the model suggested, close -to-cloce, or Parkinson formula, etc. What do we mean here by "true" ...
0
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0answers
115 views

Stochastic Volatility for Stocks, FTSE

Can someone help me with calculating Stochastic Volatility (of stocks and options) using SAS or R or Matlab please? I am new to SAS and I am trying to use Heston model, White-Hull model or any other ...
1
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0answers
178 views

Adjusting for variance bias when using overlapping data

I'm in the process of constructing volatility cones for several assets and I want to make sure the data is free of biases. I know that using overlapping data introduces an artificial degree of ...
1
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0answers
54 views

What are the estimation methods for SV models?

I want to know about some methods like Methods-of-Moments, Quasi-Maximum Likelihood method, Baysian methods using Markov Chain Monte Carlo methods. Is there any reference to have an idea of these ...
8
votes
3answers
3k views

Volatility arbitrage - how is the profit extracted?

Is there any paper that describes in detail how the profit is extracted in directional volatility bet (vol arb)? I mean in the case that I bet the realized volatility will be lower than currently ...
3
votes
1answer
246 views

How would you correct a GARCH model to deal with non mean reverting volatility?

I am currently attempting to model and forecast volatility of bitcoin but have not been able to find a GARCH model that fits the data appropriately. I've used tick data sampled at 1 hour intervals ...