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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Investment & Trading — Tracking Error

I think i am having a problem annualising my tracking error because im getting an oddly big number especially its bps. So my values are taken from Market-class where we get our returns yearly, which ...
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38 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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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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Looking for a math description of upside/downside implied vols - does Dupire help?

This is in continuation of this post which explained the meaning of the vols in the vol smile as follows: Suppose you have a downsloping vol smile. Then, the fact that the vol is higher on the ...
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calculating sharpe-ratio and annualized returns

Im trying to get the sharpe ratio to be calculated daily but I can only calculate it annually, this is also happening for my annualized returns, can somebody help me please? ...
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I would like to fit a CARR model using the 'rugarch' package in R - what should I include in the specification?

I know I have to specify a GARCH model for the square root of range without a constant term in the mean equation - just unsure how to apply this in the rugarch function.
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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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26 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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16 views

How can I calculate forecast returns given volatility and mean forecast?

I have built a model for mean and volatility forecasting of SPY. Now I want to combine these two into a return forecast. For doing this, I have written the following code in R: ...
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1answer
52 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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1answer
85 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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84 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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35 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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28 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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30 views

how to calculate yearly volatility from weekly obersvations over 179 weeks?

I am working right now at something and I want to get sure that I am not doing any mistakes - maybe you can help me: I collected weekly returns from a stock over 179 weeks and know I want to ...
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What does “invest in portfolio volatility” mean?

In this paper, Barnea, Amir, Henrik Cronqvist, and Stephan Siegel. "Nature or nurture: What determines investor behavior?." Journal of Financial Economics 98.3 (2010): 583-604. it is mentioned ...
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Extract the short-run and long-run volatility of any time series with component sGarch (rugarch)

I try to estimate a component sGarch model with the rugarch package in R. My goal is to extract the short-run and long-run volatility components of any time series. I am not interested in the ...
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63 views

Robust Sharpe ratio

The denominator of the Sharpe ratio is sample portfolio volatility, $\sigma_p$, which is the square root of portfolio variance based on the quadratic squared loss, L2. Alternatives for the denominator ...
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31 views

How to mathematically calculate the probability of GBM generating difference of less than some value

I have a custom index that follows Geometric Brownian Motion (GBM) with volatility v. I started this index at 10k with 4 decimal places i.e the starting price of ...
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1answer
95 views

GARCH Model Estimation with Standard Deviation

I want to examine exchange rate volatility on Stock Returns. Please, if I Generate Exchange rate volatility (ER_vol)using standard deviations approach, can I include the (ER_vol) as a regressor in the ...
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158 views

Uncovering patterns in price timeseries using linear regression

I have some minute-bar data which my professor suggested I resample to 5 minute bars and then separate it into timeseries per bar period. For example, I get one time series for 12:00, another one for ...
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1answer
89 views

Estimation of volatility into Black-76 formula

I am trying to estimate the (annualized) volatility that should go into an European Swaption (such as 2y5y). Given we take the black76-formula, where the discounting is the term outside the ...
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79 views

Calibrating Heston model parameters using the Active-set method and Levenberg–Marquardt

Background: We're estimating the parameters of the Heston model from current market data of options. This is to be implemented using the active-set method (see section 16.5 here) and the Levenberg-...
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Reading this ichimoku cloud how do you read this wdfc chart?

Having trouble reading the charts as the breakouts aren’t clear What do you see in this chart?
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26 views

ATM Curve Construction: Short-Dates

Please explain example 1 and example 2. In example 1 how does 6 appear in the square root function. And in example 2 it is written:" Assume it is known that spot will be completely static during the ...
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35 views

What is the best method to factoring/calculating pre and post event volatility? Such as for company earnings

What is the best method to factoring/calculating pre and post event volatility? Such as for company earnings.
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How to compute reference share price and reference volatility in CreditGrade?

I'm trying to implement CreditGrade in python, from the msci Technical Notes (https://www.msci.com/documents/10199/dd31bcce-6fe3-47b7-9fb7-10c4c8f750ba) but I'm running into some comprehension trouble ...
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53 views

looking for a simple realistic parametric volatility model

Which parametric volatility is realistic to test quickly and qualitatively a model? I do not wish to fit market quotes but would like to have a non-trivial volatility with skew or smile to do some MC ...
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Negative drift when calibrating GBM parameters

Setup for question: Consider a basket of $N$ stocks $\{S^1, S^2, \dots, S^N\}$. For fixed strike $K$, each stock in the basket, $S^i$, follows the SDE $$dS_t^i = \mu^i(t) S_t^i dt + \sigma^i(K, t) ...
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1answer
89 views

Confidence Intervals for ARMA+GARCH forecasts

I have fitted an ARMA(1,1)+GARCH(1,1) model to my logreturns series. When it comes to my standarized error's distribution however, I have opted for a Skewed Generalized Error Distribution, because of ...
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37 views

Arbitrage bounds on volatility of price of binary option?

What are the arbitrage bounds on the volatility of the price of a binary option? If the binary price moves too much (such that it violates the arbitrage bounds) what trades would you actually execute ...
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42 views

How do I export data from the volatility lab?

I am trying to export data from the volatility lab within the interactive brokers TWS platform. Specifically, I am interested in implied volatility and historical volatility for specific tickers. ...
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Volatility Skew fitting in R; Calculate option delta using various volatility dynamics

Given a fixed maturity option chain, i was wondering if there is any way to evaluation an option against this volatility surface and compute the various delta of the options wrt to volatility dynamics ...
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133 views

Interpolation of SVI Implied Volatility in parameter space

I am currently working with a slice-wise SVI parametrisation of the implied volatility surface. $\sigma^2(x,t) = a_t + b_t (\rho_t (x - m_t) + \sqrt{(x - m_t)^2 + \theta^2})$ Does anyone have ...
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58 views

Cross Effect in OLS

I am using cross effect in OLS regression for a time series problem for a multivariate regression. I want to quote reference for use of cross effect. Secondly, I want to explain why better to use ...
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1answer
131 views

Interpretation conditional volatility plot

I have plotten the log differences of exchange rates and in the same plot, I show the conditional volatility $\sigma_t^2$. The conditional volatility follows approximately the same path, but is much ...
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145 views

Calculating historical volatility and returns from bond yield

I am interested to calculate the historical volatility and returns from a time series of US 3m T-bill yield (see screenshot below), for portfolio optimization. I am not too sure how to bridge the idea ...
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84 views

What is the model behind Heston-Nandi functions in the fOptions R package?

I am dealing with Heston model in R and for this purpose I am using the package fOptions from RMetrics. The calibration formula requires the specification of some parameters (omega, lamda, alpha, ...
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80 views

How is a LIBOR Market Model volatility skew determined?

LIBOR based interest rates are derived from the prices (supply / demand) of swaptions, caps and floors. These prices are generally quoted in yield vols. Their prices are given by the Black formula. ...
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Rolling forecast using GARCH model

EDIT This is not a duplicate of my original question linked, since I have since overcome that problem and have posted an answer. Since solving the previous problem, I have run into the problem ...
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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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868 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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255 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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246 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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265 views

Volatility vs. Moving Average Distance

Currently I am designing a little market making bot for forex trading, that puts offers around the mid price. In the market I am trading it happens the order book becomes so thin that the mid price ...
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120 views

Monte Carlo volatily

I was wondering if we could do a forecast on volatility using monte carlo on an underlying asset. For example EUR/USD : Simulating a lot of possible paths on 1 year then calculate the volatilty for ...
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196 views

Black Variance Surface

I came across black variance surface in quantlib code. For options, usually volatility surface is used for pricing. When you will use variance surface for pricing or any advantages over volatility ...
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Estimating volatility

Why is $$\frac{ \left(\frac{ \Delta S}{S}\right)^2} {dt}$$ an estimator of volatility squared (as claimed by my book)? As far as I understand it, we estimate volatitility squared as $$\frac{ Var( \...
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189 views

Caplet and Swaption Volatilities

Why is volatility always quoted in terms of caplet and swaption? Why not quoted in terms of other instruments?
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Approximating an SDE for Volatility Estimation

Consider the SDE $$ dT(t) = ds(t) + a(s(t) - T(t))dt + \sigma dW(t) $$ where $s(t)$ is a deterministic function that turns out to be the long-term mean (this SDE is used to model daily temperature, so ...