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

How does accounts receivable factoring work, How does accounts receivable f...

How does accounts receivable factoring work?  What are the benefits to the two parties involved?  What are the risks? Factoring is when one firm trade accounts receivable (AR)

What is adjusted gross income, Q. What is Adjusted Gross Income? Adjust...

Q. What is Adjusted Gross Income? Adjusted Gross Income - Gross income decreased by business and other specified expenses ofindividual taxpayers. Amount of adjusted gross incom

Calculate the net present value, NPV and Other Criteria Waddington Inter...

NPV and Other Criteria Waddington International Inc. has $20 million to invest. It is considering whether to build a new factory in Western Canada. The land and the building wil

Alternative dividend policies, The managing directors of three profitable l...

The managing directors of three profitable listed companies discussed their companies'' dividend policies at a business lunch. Company A; has deliberately paid no dividends for th

Explain about cash forecasting method, Q. Explain about Cash Forecasting Me...

Q. Explain about Cash Forecasting Method ? Under this method an approximate is made of cash receipts and payments for the next period. Estimated cash receipts are added to the

Explain the term dividend cover, Dividend cover Dividend cover measure...

Dividend cover Dividend cover measures the relationship among earnings per share and net dividends per share. The higher the altitude of dividends for any given level of EPS t

Fund managers or the asset management company, Fund Managers or the Asset M...

Fund Managers or the Asset Management Company (amc) The role of fund managers is highly significant in the mutual fund operations. So far, this role is being played by the Mutu

What is capital rationing, What is capital rationing? Should a firm practic...

What is capital rationing? Should a firm practice capital rationing? Why? Capital rationing is the practice of putting dollar limits on what will be invested in new capital bud

Define some of government need imposed on public corporation, What are some...

What are some of the government needs imposed on a public corporation that are not imposed on a private, closely held corporation? Public corporations should submit audited finan

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