Stack Exchange Network

Stack Exchange network consists of 175 Q&A communities including Stack Overflow, the largest, most trusted online community for developers to learn, share their knowledge, and build their careers.

Visit Stack Exchange

What are the underlying assumptions for doing this Assumption: Historical returns are lognormally distributed with no autocorrelation. can those assumptions be tested statistically Testing: $\sqrt{xy} = \sqrt{x} \sqrt{y}$ Substitute time $t$ and variance $\sigma^2$ for $x$ and $y$ respectively $\sqrt{t\sigma^2} = \sqrt{t} \sqrt{\sigma^2} = \sigma\...


VeV is simply the scale parameter $\sigma$ such that the returns follow the $N(-\dfrac{1}{2} \sigma T, \sigma^2T)$ distribution and is obtained by inverting the VaR formula under this assumption. Have a look at this question where the full derivation of VeV is covered.


Practically, I can tell you the sqare root assumption doesn't actually hold in practice--vol is not actually homoskedastic as a result of underlying returns not being iid (the scale tends to fall just short of the square of 12 in equities as a result of heterskedasticity). A quick google turned up this, which seems to walk through precisely what you're ...

Only top voted, non community-wiki answers of a minimum length are eligible