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

Cash dividends factors that decided by stockholders, What are some of the f...

What are some of the factors that common stockholders consider when deciding how much, if any, cash dividends they desire from the corporation in which they have invested? Gene

Capital market-secondary market, Secondary Market The secondary market ...

Secondary Market The secondary market is also referred to as the stock market where dealings in shares are taken up. It helps the shareholders to find buyers for trading. Thus,

Define hedger - market participants, Define Hedger - Market Participants ...

Define Hedger - Market Participants A hedger desires to prevent price variation by locking in a purchase price of the underlying asset by a long position in a futures contract

Operating cycle, application of the operating cycle to a vegetable company

application of the operating cycle to a vegetable company

Find out the macro consequences of a reduction, Angel Athletics is trying t...

Angel Athletics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the

Symmetric cash matching, We have earlier studied that the investor ma...

We have earlier studied that the investor may have to carry cash for some time because of discrepancies arising between the timing of the bond's cash-flow and the

Explain translation gain and losses handled in different way, How are trans...

How are translation gains and losses handled in a different way as per to the current rate method in comparison to the other three techniques, which is the current/noncurrent metho

Report on liquidity and financing, Extent of Financing Required It is ...

Extent of Financing Required It is clear that sales are unsure with low, high and medium estimates of demand. This of itself gives a few uncertainty but the reliability and pr

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

Define variants of basic interest rate and currency swaps, Briefly discuss ...

Briefly discuss some variants of the basic interest rate and currency swaps. Answer:  In place of the basic fixed-for-floating interest rate swap, there are as well zero-coupo

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