Forecasting yield volatility, Financial Management

Assignment Help:

There are several methods available to forecast yield volatility. But before that, let us look into the calculation of forecasted standard deviation.

Assume that a trader wants to forecast volatility at the end of 07/08/2007, by using the 20 most recent days of trading and update the forecast at the end of each trading day. To calculate these, the trader can calculate a 20-day moving average of the daily percentage yield change.

Still now it has been assumed that the moving average is an appropriate value to use for the expected value of the change in yield. But, some experts view that it would be more appropriate to assume the expected value of the change in yield to be zero. In eq. (1) by substituting zeros in place of moving average X, we get

         Variance =  380_forecasting yield volatility.png                                                                                       ...Eq (2) 

An equal weightage is assigned to all observations by the daily standard deviation given by equation 2. Therefore, a weightage of 20% for each day is given if the trader is calculating volatility based on the most recent 20 days of trading.

Greater weightage is given to recent movements in the yield or price while determining volatility, and less weightage is given to the observations that are farther in the past. Revising equation 2 to include the weightages we get,

         Variance =  1498_forecasting yield volatility1.png                                                                                        ...Eq. (3)

Wt is the weight assigned to the observations t. The sum of all the weights assigned to the observation will be equal to 1.

A time series characteristic of financial assets suggests that a high volatility period is followed by a high volatility period and a low volatility period is followed by a low volatility period. From this observation, we can tell that the recent past volatility influences current volatility. This time series property of volatility can be estimated with the help of statistical models like autoregressive conditional heteroskedasticity.


Related Discussions:- Forecasting yield volatility

Method to assess the neurological status, Method to Assess the Neurological...

Method to Assess the Neurological Status: World Health Organization (WHO) define Stroke as interruption of the blood supply to the brain, the effects of a stroke depend on whi

State the term- overtrading, State the term- Overtrading Overtrading ta...

State the term- Overtrading Overtrading takes place when a company has insufficient finance for working capital to support its level of trading. The  company  is  growing  rapi

Brainstorming, Brainstor ming An idea production strategy that exc...

Brainstor ming An idea production strategy that exclusively encourages any and all alternatives while withholding any appreciation of those options.

Walters and gordon model, Following are the details relating to three compa...

Following are the details relating to three companies which are identical in terms of ''r'' ABC ltd MNC ltd XYZ ltd Cost of capital

Application of shareholder value maximization framework, Application of Sha...

Application of Shareholder Value Maximization Framework   Factors affecting Shareholder's Value are: Capital Market Conditions Profitability à Includes factors li

Regulatory requirements for debentures, The following guideline...

The following guidelines are applicable for the issue of Fully Convertible Debentures (FCDs), Partly Convertible Debentures (PCDs) and Non-conve

Prepare an investment plan proposal, Yanni and Joanna need some investment ...

Yanni and Joanna need some investment advice. Joanna has sold $660,000 worth of Woolworths Limited (WOW) shares that she inherited late last financial year. She has $616,000 remain

Introduction to financial management, Introduction to financial management:...

Introduction to financial management: Meaning and defecation of the financial management Finance function Scope and content of financial function Functions and

Investor’s considerations -financial market, Investor's Considerations ...

Investor's Considerations As mentioned above, every investor before taking an investment decision, must consider the following aspects: Risk: The primary consideration for t

Cash flow of reverse convertibles, (a) Let's presume that the firm may defa...

(a) Let's presume that the firm may default only on last coupon payment date and that when this take place stock price would be less than some predetermined price K at the expira

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd