Chapter 5 Volatility 风险管理与金融机构PPT（英文）.pptVIP

Volatility Chapter 5 Background The volatility of a variable is the standard deviation of its return with the return being expressed with continuous compounding The variance rate is the square of volatility Implied volatilities are the volatilities implied from option prices Normally days when markets are closed are ignored in volatility calculations (252 days per year; see Business Snapshot 5.1, page113) Implied Volatilities Of the variables needed to price an option the one that cannot be observed directly is volatility We can therefore imply a volatilities from market prices and vice versa Are Daily Changes in Exchange Rates Normally Distributed? Table 5.2, page 118 0.00 0.03 6SD 0.00 0.08 5SD 0.01 0.29 4SD 0.27 1.34 3SD 4.55 5.27 2SD 31.73 25.04 1 SD Normal Model (%) Real World (%) Alternatives to Normal Distributions: The Power Law (See page 120) Prob(v x) = Kx-a This seems to fit the behavior of the returns on many market variables better than the normal distribution Standard Approach to Estimating Volatility Define sn as the volatility per day between day n-1 and day n, as estimated at end of day n-1 Define Si as the value of market variable at end of day i Define ui= ln(Si/Si-1) Simplifications Usually Made in Risk Management Define ui as (Si-Si-1)/Si-1 Assume that the mean value of ui is zero Replace m-1 by m This gives Weighting Scheme Instead of assigning equal weights to the observations we can set ARCH(m) Model In an ARCH(m) model we also assign some weight to the long-run variance rate, VL: EWMA Model (page 123) In an exponentially weighted moving average model, the weights assigned to the u2 decline exponentially as we move back through time This leads to Attractions of EWMA Relatively little data needs to be stored We need only remember the current estimate of the variance rate and the most recent observation on the market variable Tracks volatility changes RiskMetrics uses l = 0.94 for daily