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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1answer
271 views

What is the realized volatility's estimation error?

Given an estimation procedure and real data, how would one compute the mean squared error? What value represents the "true" realized volatility in the case of calculating the Mean Squared Error in ...
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4answers
878 views

Error message in calculation Implied Volatility

I am unsuccessfully trying to find the Implied Volatilities for the SPX on a given date using information of the CBOE, as well as Open Interest, but as I run the code I am getting and error message ...
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598 views

Basics about the scaling property of volatility

It is a usual practice to calculate realized volatility $\sigma$ using the square root of the usual variance estimator $\hat{{\sigma}²}$. This is done using the stock log returns (practitioners ...
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1answer
214 views

Volatility Index Weighting Scheme

Among the several weighting schemes used for constructing volatility indices, which ones are the best for forecasting (realized) volatility? I've constructed a volatility index for emerging markets ...
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1answer
639 views

Unsystematic/Idiosyncratic/Firm-specific volatility/variance in the market model?

I was asked to use idiosyncratic volatility as a regressor in a cross-sectional regression upon cross-sectional returns as the dependent variable. Returns can be thought of as the raw log stock return ...
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1answer
34 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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56 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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1answer
66 views

portfolio volatility over time

When estimating portfolio vol. with: $\sigma = \sqrt{w^T \cdot cov \cdot w}$ How does the sample length of returns affect $\sigma$? Is it possible to exponentially weight something to give more ...
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1answer
203 views

Duan (1995) GARCH Option Pricing Model with MATLAB

This is the MATLAB code that replicates the option pricing model proposed by Duan in his paper "The GARCH Option Pricing Model". However, the parameters estimated in the file do not match with the ...
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1answer
88 views

Volatility Skew Theory

This is the case for equity options, however for foreign exchange options the volatility only decreased at ATM. Why is it that the vol used for one type of out/in the money is higher than the other, ...
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1answer
199 views

Good references on Heston Model?

I am looking for good bibliographic references on Heston Model and Stochastic volatility models in general. Does anyone know any good introductory/intermediate references on this topic?
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2answers
163 views

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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1answer
295 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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80 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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1answer
213 views

Explaining mathematically why to use the ATM vol [closed]

In this question, I got an answer that is much explaining in words what could be explained mathematically. The user who answered referenced the book "The Volatility Surface, by Jim Gatheral's". But ...
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1answer
151 views

MATLAB exercise on an European call option with time-varying volatility

I have to solve the following exercise: compute and plot the value $V = V(S, t),\ t<T$, ($T=$ maturity) of an European CALL option (with arbitrary $t$, $T$, $K$ (strike price), $r$ (risk-free ...
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1answer
718 views

Why is the ATM vol kind of an average volatility

In this question I asked about the mathematical rationale of using the ATM vol to price quanto options. One of the reasons pointed (as an answer) was, as expected, that the ATM volatility is kind of ...
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1answer
266 views

When computing Garman-Klass volatility in R why does it leave out the ten first values?

I ran this code in R vGK <- volatility(ohlc, n = 10, calc="garman", N = 260, mean0 = FALSE) and the ten first values appeared like this: ...
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245 views

Monthly returns annualized vs annual returns [closed]

Lets say that I have a stock with annual returns, $a_i $ for year $i\in \left\{1,...n\right\}$ and monthly returns $m_{i,j}$ for month $j\in \left\{1,...12\right\}$. Lets define monthly returns to be ...
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1answer
371 views

How to convert daily conditional variances into monthly?

I have a time series of daily returns and and I computed the conditional variances by means of a Garch model. Now I would like to built a regression with some other monthly data and the previously ...
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2answers
536 views

Black Scholes biases

I have been doing some research regarding options pricing (particularly using B.S) and have come across two research papers which discuss how the Black Scholes model has a tendency to overprice and ...
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1answer
206 views

Volatility and resampling

Some funds publish a new NAV value once a day. Theoretically a fund could smooth its returns by posting smaller gains and smaller losses. This practice is both dodgy and forbidden. However, this may ...
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1answer
230 views

Combine EWMA or ARCH model with estimator other than squared returns

Currently I use the EWMA model with the squared logarithmic returns as proxy estimator for the volatility, in order to forecast the volatility one step ahead in an intraday scenario (time frame is a ...
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1answer
236 views

Volatility Smile/skew in volatile markets

In a volatile market with uncertainty it's more likely that we see a volatility skew and not so much a smile. Therefore it must hold that, in chaotic markets, out-of-the-money calls and in-the-money ...
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3answers
67 views

How to compute the foreign exchange volatility within a portfolio

Suppose I have a portfolio of 5 assets. Assets 1 and 2 have foreign exchange exposures and therefore foreign exchange volatility. How can I calculate the marginal contribution to the total portfolio ...
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1answer
231 views

Historical volatility from non-uniform samples

The way I compute historical volatility is that I take two parameters $dt$ and $T$, get a list of stock prices with the step of $dt$ over the window $T$ (so $T/dt+1$ samples in total), compute $T/dt$ ...
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1answer
456 views

Is there any package in R for conditional autoregressive range model (CARR)?

I am working on a project which requires volatility estimation using range based volatility. Is there any package in R which helps me in estimating the CARR model proposed by Chou (2005).
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4k views

how to do interpolation in the term structure of volatility surface?

everyone~ I am a newbee in the quantitative finance and I meet a problem in working out an equity option volatility surface. We use the reasonable market data to derive the implied volatility, then ...
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2answers
408 views

Smoothing factor of Exponential Moving Average

I'm trying to implement an Exponential Moving Average indicator, but I'm sort of stuck on the smoothing factor. What I've come up with: $$\frac{1}{N}\sum\limits_{k=0}^N \alpha^{k} P_k$$ Where N is ...
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1answer
843 views

Interpreting and scaling of Realized Variance with sample data

I have some question about realized variance(RV) and I have some sample prices below to work with. You can run the R code below to build a vector of log returns. Three are 78 5-minute buckets in a ...
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1answer
172 views

FX Portfolio Volatility Targeting

If I have 3 different currency trades (ex short EURSEK, short NZDUSD, long USDJPY), how do I size each trade if I wish to allocate risk equally in order to target a 12% portfolio volatility (allowing ...
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1answer
420 views

Constant decreasing volatility, GARCH forecasting

I am trying to forecast the volatility using GARCH modelling in R. I fit an ARMA(1,1)-GARCH(1,1) model, but my sigma predictions are constantly decreasing. Anybody know why? ...
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1answer
169 views

Volatility of Option

I hope I'm asking this at the right place. This pertains to actuarial exam MFE/3F on Financial Economics. If $\sigma$ is "volatility" and $\Omega$ the elasticity of the stock, one formula that is ...
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1answer
252 views

Volatility tools / web sites?

Could someone give recommendations regarding volatility tools / web sites that they find useful? I am looking for information that my brokerage platform does not provide. Specifically, I want to see ...
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1answer
256 views

Volatility calculation for intra-day cash-or-nothing call binary option

Firstly, I do not have a quant finance background. This is new to me, and I imagine that this is a basic question for this group. I am calculating the price of a binary/digital option with closed-...
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1answer
308 views

Volatility Estimation

Let say I ran two strategies and got its weights at each rebalance and equity curves. I would like to combine these systems to get the performance if I were to trade them concurrently from a portfolio ...
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42 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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1answer
109 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
84 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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33 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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37 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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1answer
86 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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52 views

Vol surface fitting with 5 degrees of freedom

For an options market making operation I need to be able to build a volatility surface, based on only 5 degrees of freedom, like e.g.: MaxPut, MaxCall, Skew, Curve and At The Money Vol. Is there an ...
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42 views

How to find the volatility indices corresponding to equity indices?

I have a list of equity indices that I got through Eikon API (with Python). I successfully got their time series but at this point I would need the corresponding implied volatility, which is not ...
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1answer
126 views

To use daily volatility or annual volatility

From Joshi's Quant Interviews books: The statistics department from our tell you that the stock price has followed a mean reversion process for the last 10 years, with annual volatility 10% and ...
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53 views

Extreme AUDJPY FX vols

I'm seeing levels of -12% of market strangle vol at 25 delta for AUDJPY at 20Y onward that is causing havoc with my pricing routines, the 10 delta market strangle is trading around -6% which is again ...
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65 views

Ultra high frequency TSRV

I'd like to verify my approach to calculate high-frequency RV estimator, as introduced in Ait-Sahalia, Myklad, Zhang 2011. After reading the paper a couple of times, it seems to me, that the only ...
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0answers
83 views

How to correctly simulate volatility shocks?

I am working on the comparison of different volatility timing/target strategies on portfolios starting from different conditions (data, asset classes, calculation of realized volatility, different ...
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0answers
47 views

Volatility spread of Strangle

It's written in a book by Giles Hewitt : " The bid-offer spread quoted on a Strangle in volatility terms will usually be wider than the ATM spread to the same maturity because strikes away from the ...
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126 views

Portfolio Systematic Risk, Breaking it down into factor % contributions

I have a portfolio (p) of N equities, with let's say weights vector (m) at the start of the calculation period. Each equity has its own set of factors (like corresponding country, industry index, etc.)...

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