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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84 views

Do I have to annualize daily volatility? [closed]

I computed daily returns via $\ln(P_t)-\ln(P_{t-1})$ in order to get the volatility. But I do not want to present my results over a certain period of time (whether it's a week, a month or a year). I ...
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109 views

How to evaluate embedded floor option in inflation linked bonds if interbank inflation floor instruments cannot be used or do not exist

Suppose we consider simple case that only par is protected against base price index, so it is with zero coupon floor feature. How do we value this option given that there is no inflation floor ...
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105 views

Can simple risk management outperform portfolio optimization like this, or is there most likely an error?

I am using a simulation approach to compare the performances achievable by simple risk management and portfolio optimization for portfolio selection. My problem is that my results indicate that simple ...
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136 views

Are intraday volatility estimators useful for close-to-close predictions

I am interested in predicting the PnL of a gamma scalping strategy which trades only once per day. For simplicity, let's say we can always trade at the daily close. So, what I need to predict are the ...
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125 views

How to predict realised variance?

I am trying to predict the realised daily close to close variance of an equity index. I checked the literature on volatility forecasting and tried a bunch of things on a dataset for the S&P 500....
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95 views

Call/Put Open interest difference on similar underlying

High open interest for a given option contract is an indicator for interest in that option. For that reason I wanted to take a look at how the open interest of options on volatility have evolved in ...
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146 views

realized correlation estimation

I'm trying to implement the Hayashi - Yoshida estimator for correlation (T. Hayashi, N. Yoshida: On covariance estimation of non-synchronously observed diffusion processes, 2005) and there's something ...
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107 views

Is Hodges-Tompkins adjustment applicable for all volatility estimators?

Can the Hodges-Tompkins adjustment (S. Hodges, R. Tompkins, The Sampling Properties of Volatility Cones 2000,2002 JoD) be used to de-bias any estimator computed from overlapping observations? It ...
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4answers
211 views

Identifying “logical” segments on trading charts

The chart below is the 15-minute EURUSD from earlier today. The blue lines represent dividers between three subjective but reasonable segments that can easily be made out by the eye. I would ...
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1answer
117 views

vol swap and vol of vol

why people say vol swap is short vol of vol? Say we consider a simple vol swap with 3% strike with two days maturity here: scenario1: realized vol is 2% on day1 and 4% on day2 scenario2: realized vol ...
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1answer
203 views

Variance risk premium: When is realized vol higher than implied vol in practice?

I’m doing some work around the variance risk premium currently, and I’m interested in understanding the situations when realized volatility is > implied volatility in practice. I know in generally ...
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645 views

What does it mean for something to become more gaussian?

I was reading something in which the author said: "the longer the maturity, the more and more gaussian the gamma of your option is". What exactly is the author trying to say in non-math terms and what ...
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830 views

Vega of binary option

I'm calculating the greeks for a hypothetical binary option, and I'm getting a symmetrical parabola for the vega's of both put and call options that are OTM, ATM, and ITM. Both of them dip into ...
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81 views

Intraday volatility measures in comparison to end of day measurement

I'm experimenting with Parkinson's Number and the Garman-Klass estimator I'm wondering what the appropriate number of days to sample over, is the number over 1-day useful at all, or should one take it ...
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1answer
53 views

Why do surprises in macroeconomic variables average out to zero?

In the book Investments (Bodie, Kane, Marcus), in chapter 8, the authors discuss index models (page 247) and, in its context, systematic risk. The authors state, without explanation, that the market ...
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54 views

difficulty pricing options using stochastic volatility

can someone kindly explain why it was difficult to obtain an explicit formula for pricing options under stochastic volatility. Thanks alot.
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376 views

How accurate is the square root of time rule for VaR for a portfolio containing several different types of instruments

Assuming that your value at risk model is based on normality assumptions, e.g. using a Delta-Gamma normal model does the approximation hold perfectly for a portfolio of stocks and options? What about ...
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334 views

Expected Delta hedging frequency as function of implied (and realized) volatility

I'm looking for a proxy (or some rule of thumb) that can create a link between the implied volatility, the realized volatility and the frequency of Delta hedging required to keep the Delta as close as ...
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83 views

Are statistical arb and relative value arb strategies implicitly short volatility?

I obviously don't want to generalise here, but my initial impression of stat arb and relative value arb is that these strategies earn stable pennies during bull markets when volatility is depressed ...
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307 views

Hedging vega risk with varswaps

I have encountered a statement that in summary reads like this: Varswaps became popular after the LTCM meltdown due to high levels of implied volatility the market was seeing at the time. Hedge funds ...
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2k views

Is there anywhere I can read the paper, “The Gamma-Vanna-Volga Cost Framework for Constructing Implied Volatility Curves”

Hello there was a paper published by: M. Arslan, G. Eid, J. El Khoury and J. Roth titled "The Gamma-Vanna-Volga Cost Framework for Constructing Implied Volatility Curves" (2009). I believe they ...
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114 views

CBOE Skew Index Intuition

I was recently reading (and very much struggling to understand) the CBOE white paper on their Skew Index (CBOE Link), I thought it might be useful as I'm trying to better understand volatility skews. ...
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315 views

Forecasting volatility farther ahead with autoregressive machine learning

ARIMA and GARCH are old news for predicting volatility time series of asset returns. I am aware of papers that replace ARIMA and GARCH with machine learning algorithms to predict financial volatility ...
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1answer
71 views

Most profitable PUT strike price in these times of high volatility?

At close 3/13/20 SPY was at 270.2, by close 3/16 it dropped to 239.41 ~ 8.8% drop... I'm looking at how to capitalize on these big swings with options. I'm backtesting option strategies and plotted ...
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118 views

What are some heurestics you could use to judge if skew is cheap or expensive? If any?

Are there rules of thumbs/models that you could use to develop intuition for when skew is cheap or expensive? From what I gather, volatility is a number that is backed out of price in a sense, "the ...
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80 views

VIX and Realised Volatility Scaling

I have calculated the VIX implied volatility according to the CBOE Whitepaper: \begin{equation*} \sigma^2 = \frac{2}{T} \left(\sum_i \frac{\Delta K_i}{K_i^2} Q(K_i) e^{rT} \right) - \frac{1}{T} \...
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126 views

Hedge performance in times of volatility: Beta changes impacting PnL during market rebound

I hedge a portfolio of Global Equities (200 stocks within MSCI World universe) by shorting futures on MSCI World Net Total Return. The hedge is calculated using Beta. Beta is calculated using a risk ...
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70 views

Relationship between profit margins, historical volatility and implied volatility

In a scenario where no historic data exists in an option market, how would one come up with implied volatility for pricing of options, under the Black-Scholes-Merton model? My professor has ...
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1answer
205 views

Deriving the VIX formula

I am having trouble filling in a few steps in the derivation. From Martin (2017), we get the following assumptions: Constant continuously compounded rate $r$; The underlying doesn't pay dividens; ...
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185 views

How would you forecast volatility without using any programming languages or machine learning or anything of that sort?

I am trying to forecast volatility. I am on the tactical asset allocation team. No one on our team knows machine learning or any programming languages. We are fundamental equity research analysts ...
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351 views

Why is volatility unobservable even ex post?

I am looking into how to measure volatility, and I am not sure if I have confused myself too much in my research. So now I really need your help. So please either confirm my understanding of ...
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1answer
238 views

VARX DCC GARCH in R for volatility spillover

I have 5 series for which I want to analyze volatility spillover (to and from the series) via VARX DCC GARCH for both dynamic and comtemporaneous effect. Moreover, I would like to analyze seasonal ...
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166 views

Does this volatility-like measure have a name?

So, basically I'm looking at {=SQRT(AVERAGE((R1:R100)^2))}, or in words: the square root of the average of squared daily returns. Is there a nice simple term/name ...
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109 views

Decay factor and volatility (2 assets): do you keep simple correlation to calculate vol? or exponentially weighted correlation?

I have calculated exponentially weighted variances (and covariance) for a future and the underlying index. Now that I have exponentially weighted variances for my 2 assets using a lookback period of ...
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392 views

Are there any books/articles on how to use options to be long volatility (implied or realized)? [duplicate]

Given the market turmoil of late I have become fixated with this idea of using options to be long volatility (realised and implied). However, I dont know where to start, what to read, who to follow ...
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165 views

Connecting the dots: Black Scholes, Volatility and Implied Volatility

I am a first year Management & Finance undergrad preparing for my second year Finance courses, given that term 3 and exams have pretty much been cancelled for all British first years. During that ...
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1answer
249 views

How to apply decay factor in the volatility calculation for 1 asset?

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 ...
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477 views

Pricing In Real Life vs Theory

When selling/buying vanilla call options, do one price them according to some pricing formula (i.e Black-Scholes)? Or is the only point using pricing formulas to find the implied volatility and then ...
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345 views

Volatility Managed 6 Factor Model (Fama French) - Does it make sense?

after weeks of intense research and in spite of the current situation, I decided to ask the following question to some experts (you): I would like to develop/investigate a volatility managed six ...
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1answer
123 views

Rigorous proof that volatility target strategies actually tend to the target

I'm working on a paper about volatility timing and target strategies, practical implementation included. While writing down the mathematical description of the model I wanted to include a rigorous ...
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1answer
202 views

Extrapolate Implied Volatility Surface

I have a moneynessratio-tenor volatility surface and want to extrapolate the implied volatility for moneynessratios > 150%. The volatility surface was downloaded for different points in time, so I ...
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113 views

Pricing Options and Computing Implied Volatilities using Neural Networks, strange shape of a graph

I am sometimes confused by the expression moneyness. Can anyone tell me what is plot here ? Its from the paper called :Pricing Options and Computing Implied Volatilities using Neural Networks. ...
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1answer
140 views

why does monte carlo simulation become less accurate as volatility increases? [closed]

I simulated sample paths to approximate the price of a vanilla European call and then plotted a graph comparing this to the value achieved from the Black Scholes. Why do these values diverge as the ...
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1answer
108 views

How would you equally distribute the risk of each stock in a portfolio?

Suppose you have in-sample (IS) and out-of-sample (OOS) daily returns of N stocks (IS and OOS dates are the same for each stock). Suppose you want to calculate return captured each day as x * ret. ...
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58 views

Valuing Long-Term (5+ year) Cliquet Options

I'm trying to figure out how to value long term equity cliquet options with expirations 5+ years out. Even for SPX cliquets, vol surfaces are from what I can tell non-existent. Where would someone get ...
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1answer
143 views

Why are quadratic variation and rough paths so important in quantitative finance?

I am new to quant finance - come from a mathematics background. I am starting stochastic calculus and have been particularly interested in some papers pathwise integration and rough calculus in ...
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51 views

Relation between volatility and exercise timing of American Options

Hopefully someone can help me with intuition. Suppose that we have a stock whose value evolves per the geometric brownian motion $dX_t=X_t\mu dt+X_t\sigma dW_t$, for $\sigma>0$, $\mu\in\mathbb{R}$ ...
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59 views

For any twice differential continuous function C(T, K), does there exist a sigma(t, S) that can reproduce C(T, K)?

In the Dupire's paper, he assumes that there exits a function $\sigma(t,S)$ that can reproduce $C(T, K)$. My question is that: is the assumption true for any twice differential continuous function $C(...
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29 views

How to model the different returns of agents with different information information

For a seminar, I would like to graphically represent the returns made by agents of different information standpoints. In other words, say I have a market tuple $(\Omega, \mathbb{F}, P,S)$ where $S$ is ...
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207 views

Is Dupire's local volatility model path independent to recover historical option price?

Generally when we implement Dupire's local volatility model, we follow the steps below: Calculate implied volatility from given historical data Fit the implied volatility skew. So we also know the ...

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