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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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118 views

Can someone explain the 6 alternative volatility measures?

I'm reading this: https://www.cmegroup.com/trading/fx/files/a_estimation_of_security_price.pdf and am a bit confused as to why the "classical equation" on page 3 does not divide by n-1 nor use the ...
3
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2answers
117 views

Portfolio volatility of discontinuous portfolio

I would like to calculate an investor's average portfolio volatility as a measure of risk aversion. My problem is, that the portfolios are not continuous: the investor can have an open position for ...
3
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1answer
1k views

What is the importance of alpha, beta, rho in the SABR volatility model?

I just read that SABR model is a stochastic volatility model, which attempts to capture the volatility smile in derivatives markets. The name stands for "stochastic alpha, beta, rho", referring to the ...
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99 views

Vega with SVI Gatheral bumps

How would one go about computing a vega profile of an exotic derivative where the volatility surface is modeled using Gatheral's SVI parameterization? In particular, I am thinking about bumping each ...
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1answer
253 views

Backtest with rolling volatility in R

So I'm very new in R. I want to backtest a strategy for 3 stocks SPY, EEM, AGG. With library(RiskPortfolios), I can calculate ...
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1answer
99 views

Implied volatility of inverse quote

Suppose I have a quote of INR/USD and the implied vol surface is also given. Is it theoritically correct to use to same implied vol for analysis of the inverse quote, i.e. USD/INR. Correct me if I am ...
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143 views

Monte Carlo simulation based VaR: daily vs annual parameters

I am given the initial price, annualized return, and volatility of a security. I am trying to calculate annualized VaR using Monte Carlo simulation approach. To do this I will use the following ...
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51 views

Replication error of a long dated product

My question is a bit general : Hedging/Replicating a long-dated (FX) product with short-dated (FX) products leads to a replication/hedging error most of the times. Is it possible to quantify this ...
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237 views

Derivation of the Pnl of a Delta Hedged Straddle and Risk Reversal

In the link below, in the text it states the following equations: Delta-hedged straddle P&L = Volatility Risk-premium ×| Straddle Vega | and Delta-hedged risk-reversal P&L: ...
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1answer
201 views

Difference in exposure between delta hedged options, ATM straddles and delta hedged straddles

What is the difference in exposures between delta hedged options, ATM straddles and delta hedged straddles. They all seem to provide the same thing, which is exposure to volatility. What are the ...
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2answers
150 views

The BISAM fat-tailed volatility model vs EWMA volatility model

Came across the following marketing material where the company called BISAM (FactSet) aka FinAnalytica (?) has developed following fat-tailed volatility model: $$ r_{t} = \mu + \epsilon_{t} $$ $$ \...
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3answers
2k views

Problems with local volatility models (vs stochastic volatility models)

Why is pricing with local volatility models are problem with exotics, mainly due to "the volatility surface is the market's current view of volatility and this will change in the future meaning the ...
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1answer
527 views

Value of Call Option as Volatility goes to Infinity

Why would the value of a call option go infinity as volatility goes to infinity? I understand how you could solve this question by taking $\sigma \rightarrow \infty$ in the solution to the black ...
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1answer
223 views

Which program for a DCC-MIDAS model?

for a thesis research, I plan to use a DCC-MIDAS model. The program I was working with (STATA) is not able to run this. Do you have any suggestions as to which program is best for this analysis? ...
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0answers
78 views

Which stats are the best predictors of model sucess in real time? [closed]

What are the best predictors of real time model success in quantitative trading, i.e. # of transactions, length of backtest, StdDev, Skewness, Excess Kurtosis etc and what are the numerical values of ...
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1answer
144 views

Mixing Black Scholes with SABR

I am new to the whole concept of stochastic volatility so I am experimenting with option pricing. I think the concept is really difficult to understand / grasp. I was wondering if the following ...
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72 views

Pricing and hedging OTC vanilla options

Most OTC option textbooks are about exotic options. I'm curious how sell-side price and hedge OTC vanilla options e.g. European option. What models do they use? How to forecast volatility (using GARCH?...
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81 views

Calibrating Heston paremeters based on market data for Implied Vol for Call options

Several questions have been asked in here regarding calibration in Heston yet I have not found what I have been looking for, so I will ask: I am looking at a Heston model: $$dS_t=\lambda \sqrt{v_t}...
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1answer
151 views

Proof for ATM delta with Local col

I am looking at a time-homogeneous local volatility model where ATM implied volatility equals ATM local volatility: $\sigma_{imp}(S_0)=\sigma_{local}(S_0)$ ATM IV Skew = half of LV slope In general $\...
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1answer
359 views

SSR definition in Bergomi in relation to sticky strike and sticky delta

In Bergomi [Stochastic Vol Modelling] (Sec. 2.5.2), in the section on surface dynamics, the following definition of the "Skew Stickiness Ratio" (SSR) is made: $$ SSR = \dfrac{1}{\mathcal{S}_T}\frac{d\...
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1answer
363 views

MTM Hedging Performance of Vanna-Volga

I was wondering how well Vanna-Volga (VV) Implied Vols "perform". So I experimented with the following option parameters $$S_0=100,\ K=92,\ r=0.03,\ q=0.01,\ T=2$$ and VV parameters $$K_1,K_2,K_3=...
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1answer
308 views

Volatility swap hedge

What are the hedging methods for volatility swap (rather than variance swap)? What are the possibilities of setting up a static, semi-static or dynamic hedging? I am aware of but have not yet read ...
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1answer
79 views

Volatility of a leveraged CFD portfolio

I want to calculate the portfolio volatility (as a weighted average of the products) and the portfolio consists of CFD contracts with multipliers ranging from 10 to 50 depending on the underlying ...
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1answer
86 views

Comparing volatility of a specific period between days

I have 1 minute trade data for a particular stock and was wondering how I can compare the volatility of a particular period (08:00 - 09:00 for example) between days. I have data for 100 days and want ...
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1answer
204 views

On a FX volatility smile, Is a-delta put volatility equal to (1-a)-delta call volatility?

On a FX volatility smile in terms of delta, If I want 95-delta put vol, Is this volatility equal to a 5-delta call vol, and viceversa? Thanks.
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1answer
184 views

Deriving Delta Hedge error in the B-S setup (part 2)

In this paper paper page 16-19 by Davis and this discussion derivation of the hedging error in a black scholes setup, the derivation of the delta hedging error in the Black Scholes model is discussed. ...
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1answer
512 views

Local Volatility implementation

The Dupire equation is well-known and mentioned in thousands of articles. Although I could not find a lot of documentation about a consistent and proper way of implementing the formula (The difficulty ...
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2answers
896 views

What is the difference between squared returns and variance?

I am trying to calculate 1-day ahead volatility forecasts using the exponentially weighted moving average, however I am unsure on how to read the formula provided within Risk-Metrics Technical ...
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0answers
35 views

Volswap: fair strike and number of fixings

Let’s assume 1y vol is at 10.0% and there is no skew and the term structure is flat. Let’s assume there are 252 fixings and the annualisation factor is 252. 1) In a BS world, is it correct to say ...
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0answers
185 views

Calculating realized volatility of high-frequency data

I am wondering how to calculate the realized volatility. Sources such as say that the realized volatility is the sum of squared log returns sampled at a given frequency. So using 30 minute frequency ...
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0answers
118 views

Implied Volatility of cross currency pairs

Been looking for this... Is there any way we can infer directly, say GBP-JPY's 1-year volatility from GBP-USD's and USD-JPY's? Many thanks.
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1answer
115 views

What is the name of this VaR calculation strategy?

Here's a question on a passage from this paper I'm reading. Here's the quote: Given the vector of portfolio weights $w$, and the estimate of the conditional variance, $\Sigma_{t,k}$, the ...
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1answer
134 views

Settlement of VIX derivatives

Currently reading the paper of John M. Griffin and Amin Shams "Manipulation in the VIX?". My questions has to do with settlement of VIX derivatives (options and futures on VIX). The paper states that ...
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0answers
60 views

How to derive the change in portfolio value as given by Gatheral in The Volatility Surface?

I’m trying to follow Gatheral’s Volatility Surface Ch. 1, i.e. the text (pg. 5 and 6) linked to in this question, with further text discussed in this question. I can’t figure out how to arrive at the ...
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2answers
439 views

GARCH modeling - sliding or expanding window?

In practice, when modeling volatility do people tend to use expanding or sliding windows to fit GARCH models? For example see rolling forecast generation vs recursive forecast generation in the ...
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0answers
244 views

Why is Bachelier implied volatility more skewed than the Black-Scholes implied volatility?

I found the following explanation in a paper by Grunspan (see attached paper page 6) but have trouble understanding it: By differentiating Formula (3) with respect to m, it turns out that the ...
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0answers
46 views

Why hasn't SVXY recouped more of its lost value as vol has crashed in the past 2 weeks?

SVXY fell from around \$140 to \$9. It has since bounced back 25% to around \$12. Vix futures went from the 11-14 range to 35 and now back to 17-18. SVXY holds a short position in Vix futures with ...
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1answer
228 views

Manipulation of VIX

Having finished my reading on CBOE's method of calculating the VIX on out of the money call and put options written on S&P 500,I have a thought about the ability of market making firms to ...
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2answers
118 views

Nature of short VIX strategies

By now, we all pretty much know that the recent upsurge in the VIX Index caused the spectacular failure of some Exchange-Traded Products (ETPs) or Exchange-Traded Notes (ETNs) written on it. An ...
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0answers
207 views

Frequency Arbitrage

We know that the volatility is lower when the sampling period is longer, for example $\sigma_{7days} < \sigma_{1day}$, Then I came across this strategy that I cannot quite understand how to exploit ...
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1answer
309 views

Excel Add-In Volatility Interpolation I am trying to Understand

The Microsoft Excel at my investment bank has an .xll add-in with a function whose coded functionality I cannot observe. This function is called VolInterp and as the name suggests, calculates the ...
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32 views

Estimate VARMA(p,q)-GARCH(r,s) model

Can I estimate VARMA(1,1)-GARCH(1,1) model using R? please suggest any package or chunk of R-codes to estimate this model. Thanks
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0answers
55 views

What does multifrequency volatility mean?

I came across the term "multifrequency volatility" while reading the book "Multifractal Volatility: Theory, Forecasting, and Pricing" (2008) by Calvet and Fisher. Can anyone help me understand what ...
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2answers
720 views

Volatility Target Optimization - Python

I'm testing a volatility target strategy in Python. This process involves solving the following optimization problem at each rebalance date $$\min_w \left(w^T\...
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1answer
160 views

what's the difference between market implied volatility and implied volatility?

what's the difference between market implied volatility and implied volatility, how it could be calculated? also what's the quoted implied volatility? thanks.
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3answers
461 views

How did the SVXY ETF (-1x VIX) survive a 115% jump in VIX?

The SVXY ETF is a "-1x" short exposure to the VIX, rebalanced daily. Very importantly, it is an ETF, and not an ETN. As an ETF, its holdings are fully transparent and posted on the fund sponsor's ...
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1answer
79 views

Why do traders think about options in terms of volatility? [duplicate]

I hear that in practice, traders quote options prices in terms of volatility. What is this convention, and what is the motivation? How do they think about and manage vega risk?
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2answers
291 views

What is meant by innovations in volatility?

I am currently reading about stocks with "high sensitivity to innovations in aggregate volatility". I am not a native speaker so this might be a trivial question, but I truly cannot find an answer ...
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1answer
112 views

Data on Options on US-Treasury Futes

I am working on an assignment on the Implied Volatility Surface for the options on US-Treasury futures (ZB, ZN, ZF, etc.). I need data on bid and ask, Imp. Vol, Price of underlying etc. Do you know a ...
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1answer
323 views

Pricing VIX Futures

In a 2006 paper Zhang and Zhu propose a model for VIX and VIX Futures based on Heston. I am struggling in understanding how they get equation 6 and 8 (where they define the parameters). Can anyone ...