Non-parametric estimation of historical volatility |
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Authors: | John A Randal Peter J Thomson Martin T Lally |
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Institution: | 1. Victoria University of Wellington , Wellington , New Zealand;2. Statistics Research Associates Ltd , Victoria University of Wellington , Wellington , New Zealand |
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Abstract: | Evolving volatility is a dominant feature observed in most financial time series and a key parameter used in option pricing and many other financial risk analyses. A number of methods for non-parametric scale estimation are reviewed and assessed with regard to the stylized features of financial time series. A new non-parametric procedure for estimating historical volatility is proposed based on local maximum likelihood estimation for the t-distribution. The performance of this procedure is assessed using simulated and real price data and is found to be the best among estimators we consider. We propose that it replaces the moving variance historical volatility estimator. |
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Keywords: | Financial mathematics Financial modelling Financial simulation Financial engineering Derivatives pricing Derivative pricing models |
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