RISK MANAGEMENT

by 0 comments on "Hedging Market Risks Using Volatility Estimators-Are Sophisticated Methods Better?"

Previously, we elaborated on why hedging is an important tool for risk management. We illustrated the importance of hedging with examples from the commodity, mortgage back securities, and foreign exchange markets. A recent paper [1] evaluated the hedging effectiveness of various range-based volatility estimators. Among them, we can find the commonly used GARCH model. Generalized…

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by 0 comments on "Forecasting Implied Volatility with ARIMA Model-Volatility Analysis in Python"

In a previous post, we presented theory and a practical example of calculating implied volatility for a given stock option. In this post, we are going to implement a model for forecasting the implied volatility. Specifically, we are going to use the Autoregressive Integrated Moving Average (ARIMA) model to forecast the volatility index, VIX. In…

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by 2 comments on "Forecasting Volatility with GARCH Model-Volatility Analysis in Python"

In a previous post, we presented an example of volatility analysis using Close-to-Close historical volatility. In this post, we are going to use the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model to forecast volatility. In econometrics, the autoregressive conditional heteroscedasticity (ARCH) model is a statistical model for time series data that describes the variance of the…

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by 4 comments on "Garman-Klass-Yang-Zhang Historical Volatility Calculation – Volatility Analysis in Python"

In the previous post, we introduced the Garman-Klass volatility estimator that takes into account the high, low, open, and closing prices of a stock. In this installment, we present an extension of the Garman-Klass volatility estimator that also takes into consideration overnight jumps. Garman-Klass-Yang-Zhang (GKYZ) volatility estimator consists of using the returns of open, high,…

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by 0 comments on "Garman-Klass Volatility Calculation – Volatility Analysis in Python"

In the previous post, we introduced the Parkinson volatility estimator that takes into account the high and low prices of a stock. In this follow-up post, we present the Garman-Klass volatility estimator that uses not only the high and low but also the opening and closing prices. Garman-Klass (GK) volatility estimator consists of using the…

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by 0 comments on "Parkinson Historical Volatility Calculation – Volatility Analysis in Python"

In the previous post, we discussed the close-to-close historical volatility. Recall that the close-to-close historical volatility (CCHV) is calculated as follows, where xi are the logarithmic returns calculated based on closing prices, and N is the sample size. A disadvantage of using the CCHV is that it does not take into account the information about…

Read More Parkinson Historical Volatility Calculation – Volatility Analysis in Python
by 0 comments on "Close-to-Close Historical Volatility Calculation – Volatility Analysis in Python"

In a previous post, we touched upon a stock’s volatility through its beta. In this post, we are going to discuss historical volatilities of a stock in more details. Also referred to as statistical volatility, historical volatility gauges the fluctuations of underlying securities by measuring price changes over predetermined periods of time. It is the…

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by 0 comments on "Value At Risk – Financial Risk Management in Python"

Value at Risk (VaR) is a tool for measuring a portfolio’s risk. Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. … For…

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by 0 comments on "Another Misuse of Financial Derivatives"

Just like any financial derivatives that were initially designed for risk management purposes, interest rate swaps are an effective tool for managing and transferring interest rate risks as long as those risks are well understood.  But as banks and financial institutions are constantly trying to invent new financial products to sell to their consumers, sometimes…

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by 0 comments on "Are Collateralized Loan Obligations the New Debt Bombs? Part Two"

In a previous post, we discussed the risks of Collateralized Loan Obligations, a type of complex credit derivatives.  Since then, the trend in securitizing loans is still upward. Nowadays, not only performing loans but also non-performing loans are being securitized and sold to investors. A non-performing loan is a loan that is in default or…

Read More Are Collateralized Loan Obligations the New Debt Bombs? Part Two