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Questions tagged [volatility]

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

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Question about Bergomi's Model

I have a question pertaining Bergomi's modela and rough Bergomi's Model. It seems that it is the second gerneration of stochastic volatility models, (after Heston), because they are 2d stochastic ...
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VXX Put pricing

Last week at Friday's close, the Dec 14 37.5 Put options were selling for \$.68 with VXX at \$40.29. This week at Friday's close, the Dec 21 37.5 Put options were selling for \$.38 with VXX at \$40.50....
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Calculating Intraday Volatility Using Tick Data

I have exchange tick data and I was wondering how to calculate intraday volatility without having to resample the data set (e.g. to 1 or 5 minutes). I have a time series of n rows of the security's ...
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What is the use of undiscounted Futures/Option Prices

Reading the great book of Gatheral on Vol Surfaces (link) I can't help but notice that throughout he uses undiscounted option prices (though he obviously never assumed rates to be zero). See e.g. ...
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arbitrage free volatility surface

Why is calendar spread arbitrage equivalent to $\partial_t \omega(k,t) \geq 0, \forall k \in \Bbb{R}$ where $\omega(k,t) = \sigma^2(k,t) t$ and $\sigma(k,t)$ represents the Black-Scholes implied ...
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Mean model selection in GARCH modelling

I'm modelling the volatility of returns for a NASDAQ-traded stock using a GARCH approach. I chose an ARIMA(1,0,0) with drift (based purely on AIC) as the mean model for the logreturns. My question is ...
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48 views

Volatility Managed Strategies for Bond Portfolios

I tested a VMS on 2 portfolios, proxied by Equity and Bond. The Sharpe ratio for the Bond portfolio is -0.19, compared to 0.48 for Equity. I was wondering what the economic intuition is behind the ...
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implementing Volatility Managed Portfolios

How to I calculate the value of c in the vol-managed equation specified by Moreira & Muir Volatilty Managed Portfolios (2016) Equation 1? Portfolio return in month t+1 =$$\frac{c}{RV_t^2}f_{t+1}$$...
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Determining trade trigger at higher frequencies

Let's say that I have an exponential moving average as a momentum indicator on a stock at the daily scale (EOD). My trading strategy is to buy the stock on a sufficiently large close over the EMA. ...
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Calculating realized volatility with excess or raw returns

I have read a couple of papers on realized volatility forecasting. If I am calculating the realised volatility of the S&P 500, should I use excess returns or raw returns? What is the standard ...
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1answer
55 views

What is, here, the relationship between “compound” and “arithmetic return” and “volatility”?

I'm trying to find the exact (ie, not an approximate) relation between the "Compound Return", "Arithmetic Return", and the "Annualised Volatility" as given the assumptions below, and from there the ...
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1answer
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Variance Swap : dividends and rates

In a simplified world you can assume that the var swap is replicated by a continuous set of calls and puts and interest rates are equal to zero. So your PNL is only sensitive to the volatility. But in ...
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1answer
112 views

Fractionally Integrated GARCH

I am currently working on a project to compare different GARCH(1,1) models on a financial data set. I use the rugarch package in R, and everthing seemed fine at first. However, now that I have started ...
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19 views

Best Garch order

I fitted a garch(1,1) model to daily commodity return. The co-efficient of lagged residual square (so called ARCH term) is significant with normal standard deviation, but becomes insignificant with ...
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1answer
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Relationship between asset volatility and debt and equity value

So how I understand it, higher asset volatility implies a higher call option price. The Merton Model holds that the value of equity is a call option. This therefore implies that the equity value must ...
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1answer
72 views

Options on realized volatility / variance

If I'd like to price options on variance/volatility in the Heston model. Is MC simulation and/or finite difference the only way to do it? Or is there an analytical expression for the probability ...
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1answer
124 views

Realized volatility forecast vs Implied volatility

I have forecasts of realized volatility, as well as implied volatility for individual traded options of the S&P500. I want to simulate a simple trading strategy; that is, buy signal=1 if ...
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53 views

Barra covariance matrix construction

I am trying to replicate the covariance matrix used by Barra risk models. All Barra models have half life parameters for volatilities and correlations (e.g. if the half life for volatlity is 90 days, ...
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Straightforward question about paper on Arbitrage-Free Smoothing of the Implied Volatility Surface

In the paper Arbitrage-Free Smoothing of the Implied Volatility Surface by Matthias R. Fengler (2005) (https://core.ac.uk/download/pdf/6978470.pdf), if $\lambda =0$ on equation (1) then the solution ...
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1answer
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Variance-Covariance VaR: how to get the volatility?

Because the variance-covariance VaR assumes that the returns are normally distributed, in theory it is easy to get VaR by simply finding the mean and the volatility (standard deviation) of the ...
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Estimating daily volatility of unevenly/irregularly spaced time series data

Say I have time-series data that is unevenly spaced, with anything between 4-50 hours of spacing in between. The data comes from a trading account history, which has captured the balance of the ...
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target correlation for portfolio

Given a long / short equity portfolio, I want to have some net long exposure. My portfolio volatility is fixed to a target, so in trying to have a certain beta to the market, the only thing I can ...
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Volatility Index for Industries

The VIX index is based on the S&P, I am wondering the feasibility of creating a VIX index for each of the S&P 500 Industries? Would this even be possible?
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How accurate are Black-Scholes estimates of Vega, Volga, Vanna

Wikipedia provides analytical formulas for calculating Greeks. I can get Delta, Gamma, Theta all from Bloomberg. I need Vega, Volga, Vanna for my research. Should I use these analytical formulas for ...
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2answers
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Volatility clustering and Behavioral Finance, possible explanation

Currently studying about time series modelling of financial data and faced the known GARCH$(p,q)$ model for modelling volatility. We observe that big changes are followed by large changes and vice ...
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2answers
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How is forecasting volatility useful? [closed]

How is volatility useful - from a purely profiteering perspective? If a quant has good in sample volatility forecasts what can they do with this information? How are options and futures useful? What ...
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Is this Expected Returns vs Volatility Scatter Plot valid?

I am working on a Udemy course on Portfolio Allocation, learning the basics in Python. I have 5 companies, I assign different weights of the total investment that is distributed to each company (the ...
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1answer
115 views

Daily idiosyncratic volatility?

I have a long daily times series of individual stocks and would like to obtain daily idiosyncratic volatility (keeping the same frequency). Apparently, the widely used methodology of Ang 2006 would ...
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Why do we require a continuous volatility calibration while pricing Options [closed]

On pricing Options the volatility surface is represented by a mathematical model (with parameters). What does it mean to calibrate the volatility surface How often has the volatility surface to be ...
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2answers
60 views

Procedures to follow when VaR model fails backtest

I was wondering what the correct procedure is to follow when a VaR model fails a backtest (either conditional coverage and/or independence tests)? Assuming I am restricted to using a historical VaR ...
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2answers
121 views

Why do we need to calibrate vega?

I was going through some paid video on options. The tutor in the video asked the following question: Person $A$ has the following portfolio at the start of April Portfolio of options with vega $20,...
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61 views

Can prediction of realized volatility for next day improve delta hedging (gamma scalping)?

Im quite confused. As I understand from standard delta PNL of option + underlying position, pnl is equals to difference between realized and implied vol weighted by gamma. However, as I understood, ...
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Adding volume information to calculation of volatility

Is there a method to add volume information to the calculation of daily volatility for an equity? Standard measures, just assume all trading days are the same and use SD to get the volatility, ...
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Forward implied vol vs Instantaneous vol

In the Discrete Stochastic Implied Volatility Model which is from the standard Heston Model, the model shows the evolution of forward implied volatilities with time. I thought forward implied ...
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1answer
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SABR ATM volatility

The ATM implied volatility is important in SABR when calibrating the model. Let's consider the ATM vol (for a european call option): $$\sigma = \frac{\alpha}{f^{1-\beta}} \left[ 1+ \left(\frac{(1-\...
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Inflation options volatility data

I am currently interested in the vega hedging of inflation derivatives. Are there any specific market practices in this field? Furthermore, I would like to know if the liquidity is sufficicent to ...
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Rough Volatility Prediction - Gatheral, Jaisson, Rosenbaum Paper

I just read through the paper "Volatility Is Rough" by Gatheral, Jaisson and Rosenbaum. There is a website (link: http://tpq.io/p/rough_volatility_with_python.html) that details the simulations they ...
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2answers
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Are there methods of calculating Implied Volatility in the stock market, other than Black-Scholes?

(I've gone through many questions/posts on quant StackExchange and only find responses about Black-Scholes)
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119 views

Industry standard for interpolating FX volatilities

I'm looking to replace the FX vol interpolation scheme at my firm, and was wondering what the industry standard was. We used to do vanna-volga, but it only takes 3 points (25dp, atm, 25dc), and so ...
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1answer
132 views

Finding parameters of a function for optimal market making with real data

I am reading this paper and trying to apply it with real data to do some simulations. I will use realtime order book & market order data that I will receive from the exchange. This is a sample ...
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1answer
95 views

How could one trade volatility skew if you think it's too flat or steep?

We all know that you can trade on a forecast of volatility by dynamically hedging, but I'm wondering if there's a similar technique where in you can trade the skew specifically? Let's say you travel ...
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Calculating realized volatility from a list of trades

I was wondering if you were given a list of trades with different timestamps that is not periodic, how would you calculated the annualized realized volatility? If you had just candlestick data, that's ...
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1answer
112 views

beginner portfolio statistics - annualized volatility of multi-asset portfolio

Sorry for the dumb question, but I wanted to make sure my understanding of what I read and compiled was correct! I am trying to calculate the variance-covariance matrix, and annualized volatility of a ...
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ATM strike and ATM vol for equity option chain

I wanted ti ask about equity index option vols. Often we get the bloomberg quotes for equity option chains, they don't give what is the atm vol, but perhaps just some strikes near the current spot. ...
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267 views

Calculate Idiosyncratic Risk?

I have basic finance background but I am trying to calculate idiosyncratic risk as measure for firm risk in my CEO gender research. I have found the following on Alpha architect but I am unsure of ...
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39 views

Does it make sense to calculate an option price in future (at t+1)?

Often I ask myself whether it makes sense to calculate the price of a Call at t+1 supposing for example that underlying asset does no move i.e. $S_{t+1} = S_{t}$ ...
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Identifying primary share class of U.S. firms and deleting excess observations

I have a fairly large dataset of CRSP firms with their daily closing prices from 2006 till 2017. I need to filter the data so that I have one daily observation per unique firm. I've identified the ...
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1answer
77 views

Drift of Local Volatility Model - Dupire

i understand that the local volatility function can be computed from the implied volatility surface.(i.e there is no calibration to option prices, we just need the full implied volatility surface only)...
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1answer
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Choosing the Correct Periods for Yang-Zhang Volatility

I am implementing the formula for YZ Volatility using this link. I am testing it on hourly Forex charts and I'm getting some strange numbers. Taking the 14 day YZ volatility using ...
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Can someone give a simple example of how stochastic volatility leads to volatility skew/smile?

I've been trying to understand skew and volatility, unfortunately I don't have the mathematical background to necessarily dive into some of the papers, I've tried but the mathematics can overtake me. ...