RSM432H1 Chapter Notes - Chapter 10: Compound Interest, Autoregressive Conditional Heteroskedasticity, Implied Volatility
Document Summary
Chapter 10: volatility: volatility is standard deviation of return provided by variable per unit of time when return is expressed with continuous compounding day. Variance rate per day is variance of return in one day. Increases linearly with time: assume 252 trading days in a year. Volatility is much higher on business days: continuously compounded return on day i can be calculated as or, assuming return each day are independent with constant variance, standard deviation is. Assume mean is 0: makes more sense to give more weight to more recent observations. Garch has mean reversion, ewma does not. Maximum likelihood methods: used to predict parameters from historical data, chooses values for parameters to maximize chance of data occurring. Considering estimating variance of x from observations when underlying distribution is normal and mean is 0. Likelihood of ui is probability density function for x when x=ui.
