I read somewhere that the decay factor is (1-lamba)*lamba^t where t is first return, second return, third return, ...
I also found this formula which I have difficulty to understand:
How do I calculate the volatility of my asset taking into account my 0.97 decay factor? I have the time series of daily prices.
Normally to get volatility I would get the average daily return, then calculate the variance by summing all the (return-average return)^2 and dividing by N.
I would then square the variance and multiply by square(25) to have a volatility for a period of 1 month.
At what stage am I supposed to incorporate the decay factor?