Beruflich Dokumente
Kultur Dokumente
1-21
Estimating Volatility
Define n as the volatility of a market variable on day n, as estimated at the end
of day n-1. n2 as the variance rate.
Define Si as the value of the market variable at the end of day i.
Define ui as the continuously compounded return during day i (between the end
of day i-1 and the end of day i)
Si
ui ln
Si 1
1 m
u un i
m i 1
m
1
2
n2
(
u
u
)
n i
m 1 i 1
2-21
Estimating Volatility
For the purpose of monitoring daily volatility, we give the following
changes:
is assumed to be zero.
m-1 is replaced by m.
3-21
Estimating Volatility
Weighting Schemes
The above formula gives equal weight to un1 , un2 ,......, unm . Our objective
is to estimate the current level of volatility, so we give more weight to recent
data.
m
iu
2
n
i 1
i 1
4-21
(i j where i j )
ni
Estimating Volatilities
ARCH Model
VL i u
2
n
i 1
( i 1)
2
ni
i 1
Defining
iu 2
2
n
5-21
i 1
ni
Estimating Volatilities
EWMA Model
The estimate, n , of the volatility for day n (made at the end of day n-1) is
calculated from n 1 ( the estimate that was made at the end of day n-2 of the
volatility for day n-1) and u n 1 (the most recent daily percentage change).
High values of will minimize the effect of daily percentage returns, whereas
low values of will tend to increase the effect of daily percentage returns on
the current volatility estimate.
6-21
7-21
8-21
Estimating Volatilities
GARCH(1, 1) Model
n2 VL un21 n21
The (1,1) in GARCH(1, 1) indicates that n2 is based on the most recent observation
of
n2 un21 n21
9-21
Estimating Volatilities
GARCH(1, 1) Model
n2 VL un21 n21
10-21
Estimating Volatilities
Mean Reversion
Expected path for the variance rate
Variance rate
Variance rate
VL
VL
Time
Graph a
Time
Graph b
11-21
12-21
13-21
14-21
Estimating Correlations
Estimating Correlations
XY
cov n
x ,n y ,n
15-21
201311
cov n cov n 1 (1 ) xn 1 yn 1
=0.9 0.000225+(1-0.9) 0.25% 1.5%
Answer: C
=2.025%%+0.0375%%=2.06265%%
XY
16-21
cov n
x ,n y ,n
2.06265%%
0.66
1.25% 2.5%
201405
Answer: A
1
1
23 0.9703
2
2
Weight for five days old= 4 (1 ) 0.97034 (1 0.9703) 0.026
17-21
201405
n2 n21 (1 )un21
Answer: C
18-21
201405
19-21
201405
Answer: B
20-21
FRM
21-21