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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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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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156 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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92 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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167 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 ...
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122 views

SVI Zeliade Vol Surface Calibration

Have a question about SVI Zeliade Implementation (pdf, overview). The paper suggested to do 2 rounds of optimization, first for $\{a,b,\rho\}$ and 2nd for $\{m,\sigma\}$. Does anyone know if I can ...
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29 views

Historical Volatility Between Two Price Points

I would like to calculate the historical volatility of the difference (basis) between two geographic price points for energy futures assuming a normal distribution. I am unsure as to the approach I ...
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63 views

Spread in Option Quotes

Let's take a look at market-maker's option quote in vol terms: 8.5 / 9.5. In that example bid-ask spread equals 1.0 point of vol. Can anybody clarifying how market-maker choose amount of spread in ...
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28 views

How do I apply Fuzzy-GARCH to forecast real data?

I am currently working on fuzzy-GARCH to forecast. I would like to know how this can be done starting from scratch using an example (including obtaining consequent parameters). Next, how do I get two ...
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63 views

How can I compute a realized variance for raw instead of log returns?

Whenever I read about calculating realized variance, people are using log returns. However, I was asking myself whether it is possible to calculate realized variance also for simple, raw returns. ...
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183 views

Should the geometric standard deviation be used to compute the volatility of financial returns?

When computing an average financial return over time (rather than cross-sectionally), the geometric mean is generally preferred to the arithmetic mean because it accounts for the geometric growth ...
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116 views

Criticise GARCH relative to Realized Volatility

I would like to have your opinion about a simple question. While GARCH would be useful to calculate the conditional volatility, and the RV being in some sense the "historical" volatility, what would ...
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671 views

Local vol, stochastic vol, implied vol

I've been studying volatility modelling over past the few days; in particular, the connections between local vol, stochastic vol, implied vol. I've been reading Gatheral's book "The volatility surface"...
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Measure how different forecasted volatility is from realized volatility

Hi Quantitative Finance Stack Exchange, I'm looking for an opinion on a simple question. Suppose I use a Garch(1,1) model to make a volatility forecast. At time $t$, I have realized volatility $\...
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170 views

Understanding how market making helps investors

I'm reading about high frequency trading and market making. I'm trying to understand the following example from my book: Here is an example of how market making helps investors. Suppose that the best ...
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1answer
227 views

Leveraged Permanent Portfolio Using ITM Call Options

The permanent portfolio proposed by Harry Browne has had an excellent track record since the 1970's. It is able to compound at roughly 8% annually with a Sharpe ratio around 0.7. The permanent ...
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1answer
224 views

talib.ATR or other ATR calculation

I have my data stored in df1 with the columns: Date Time Open High Low Close Vol OI I want to calculate the 20 period ATR from ...
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250 views

What's volatility timing?

I'm new and i'm starting studying finance. My english level is not so good. Could you explain me please, what is volatility timing? Thanks to all
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74 views

volatility adjustment on momentum

I am trying to figure out what this text means any advice is greatly appreciated. "volatility-adjusted crossover signal where momentum is measured by comparing a short-horizon (45 days) moving ...
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31 views

The sign bias test isn't significant but still use EGARCH

I'm Risqia from Indonesia. My final task is calculating VaR using EGARCH.. all of the p-value in sign bias test more than 5% so the null hypothesis isn't rejected, it means that the residual is ...
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99 views

Use of Historical Volatility in Black 76 Model

I am trying to use the Black 76 model to calculate the price of a bond option. Is it possible to use the historical volatility of the bond prices (say standard deviation of the log returns over the ...
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1answer
366 views

Volatility Forecasting of VIX

Background: As we know, volatility in the long run is mean reverting. Given that volatility is mean reverting, when volatility is low, it tends to go up. When it is high and going down, it tends to ...
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85 views

volatility term structure calibration

As is well known in order to calibrate an interest rate model (i.e. hull-white, LMM) i need to use the current market yield curve and volatility. But in the case I want to calibrate the model in a ...
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52 views

Equity Options - “How do I build a forward simulation model with regards to shocks in spot pricing and IV?”

I am trying to build a "What-If" Portfolio, consisting of a total of 20 options, across different tenors, strikes (delta), but on the same security. Simply put, the objective is for me to test the ...
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22 views

Is variation in price-dividend ratios that is attributable to excess returns due to variation in returns or variation in risk free rates?

Cochrane and Fama show that "all variation in price-dividend ratios corresponds to changes in expected excess returns -risk premiums- and none corresponds to news about future dividend growth". Is ...
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178 views

Volatility of stocks small cap vs large cap

I read that small cap stocks are more volatile than large cap stocks. Now I am looking for sources (e.g research papers or similiar) with empirical evidence for this proposition but I can't find any (...
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70 views

How to generate variance impulse response function as in Hafner and Herwantz (2006)?

I am trying to generate variance impulse response functions as described by Hafner and Herwantz (2006) and in Walter Enders' book "Applied Econometric Time Series". Is there a command in R for this? ...
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37 views

VaR of future foreign currency income stream

Assume I have a series of future incomes in a single foreign currency. How do I calculate the total VaR for this forex risk using the volatility method? My first thought was that I could simply add ...
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1answer
109 views

XIV Positive Roll Yield

I understand that VIX futures are usually in contango and so a portfolio that holds futures with a weighted average expiration of 30 days will "roll" down to equal the VIX index at maturity. This is ...
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121 views

Why are some Yang Zhang constant k different from the original paper?

I've seen this in the original paper (Yang, Zhang: Drift Independent Volatility Estimation ...) (see Equation 10, Page 483) $$k = \frac{\alpha - 1 }{\alpha + \frac{ n + 1 }{ n - 1 }}$$ while there ...
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23 views

rugarch Sigma Band

Can someone give me a high-level explanation as to how the unconditional 1-sigma band is calculated in ugarchforecast, how to interpret the results of this band, and how it differs from ugarchpath? Is ...
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39 views

Vol structure of forward rate under no-arbitrage rate model

This is the statement of volatility of no-arbitrage rate model in John Hull's book Options, Futures and Other Derivatives 9th ...
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0answers
83 views

How to estimate $\sigma$ and $r$ in binomial pricing model?

I am writing a program to price American put options with binomial pricing model and to compare it with the market price. When I used made-up numbers for $\sigma$ and $r$, the price by binomial ...
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42 views

Looking for material on volatility forecasting with a focus on market/news events

I'm hoping someone can direct me towards any books/papers that approach volatility forecasting from the perspective of market specific events (fed meetings, USDA reports, OPEC announcements etc). From ...
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93 views

Realized volatility vs Fundamental volatility

What is the difference between the realized volatility (also called historical volatility) and the fundamental volatility?
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81 views

What is a good algorithm to predict volatility in metals commodity markets? [closed]

I'm trying to create a script to predict major swings in the price of Aluminium. I am trying to implement a dynamic time warping algorithm for the same. Was wondering if this really is the best ...
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151 views

Positive PnL with long volatility strategy

Suppose I was interested in longing volatility. Suppose I bought a long straddle today which expires in 3 months. Suppose that volatility was very high in those 3 months, however, the stock expires at ...
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125 views

inverse of stock price [closed]

Is there any intuition to use 1/P (inverse of the stock price) as a factor of volatility? $VOLT = \beta_1 * \frac{1}{P} + Res$ P.S: In a research paper, I found it's related to the market micro-...
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Time frame for implied vs realized vol

I've seen charts of implied vol (IV) against realized volatility? What time frames do people generally use to calculate each? For example, do people generally use ATM 1 month call options to get IV, ...
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159 views

Build Implied Volatility Smile

I am currently to create my own volatility smile for cryptocurrency options. I am basically reading the bids and offers and calculating the implied volatilities. I now want to shape and parametrise ...
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1answer
232 views

Daily Return to Approximate Annualized Realized Volatility 16 or 20?

Sometimes traders approximate realized volatility to compare it to the annualized implied volatilities in options by multiplying the 1-day daily return (as a substitute for the daily volatility since ...
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1answer
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PRIIPs category 2 stress scenario methodology

recently new document has been provided by EU supervisors regarding the new PRIIPs KID methodology. (PRIIPs KID is 3page document about the fund/product that is being sold to clients. It has to inform ...
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329 views

Why is the volatility smile so important

This might seem like a dumb question. When using a volatility model, stochastic for example, we try to calibrate it so that it fits the implied volatility smile given by the market, but why is this ...
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1answer
55 views

How to extend Realized Volatilty to multiple periods

I'm trying to calculate 5-day realized volatility (as proxy for integrated volatility) using 5-min frequency data. I'm working from the paper CORRECTING THE ERRORS: VOLATILITY FORECAST EVALUATION ...
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238 views

Paradox in option expiry as volatility goes to infinity

As volatility goes to infinity, the delta of a call option goes to 1. The delta approximates the probability that the option expires in the money. So it seems that the probability of expiring in the ...
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67 views

What is 'off term' volatility and 'term' volatility?

I see these terms being used on the floor, but don't really understand precisely what is being referred to. One colleague asserted that an 'off term' volatility is for an option whose delivery date ...
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How does volatility affect price arbitrage?

Suppose I'm running automated classic price arbitrage on 3 currencies (let's ignore the unfeasibility of this in our day and age). We have currency pairs Gold/Silver, Silver/Bronze, and Gold/Bronze. ...
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126 views

Unconditional variance of an E-GARCH model

I am attempting to calculate the unconditional variance of an E-GARCH model: $$\log(h_{t+1}) = \beta_{0} + \beta_{1}\log(h_{t}) + \beta_{2}\left[|\varepsilon_{t} - \lambda| + \gamma(\varepsilon_{t} - \...
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39 views

Volatility taxonomy

I have been thinking about this for a while... I can't make my head around it because of the gap that there's still on between financial economics and quantitative finance. Usually, when a student is ...
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1answer
332 views

Probability of exercise in the Black-Scholes Model

What's the intuition behind the fact that the limit of $\mathcal{N}(d_2)$, i.e. the (risk-neutral) probability of exercise, in the Black-Scholes Model tends to $0$ when the volatility tends to ...
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238 views

GARCH Option Pricing Model (Duan 1995)

I am trying to replicate Duan's results from his 1995 Paper, "The GARCH Option Pricing Model". I have written this code in Python myself, and using his parameters I consistently seem to obtain results ...