34 lines
2.6 KiB
Plaintext
34 lines
2.6 KiB
Plaintext
732 Part VI: Measuring and Trading Volatility
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al volatility was lower, then when you make the volatility prediction for tomorrow,
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you'll probably want to adjust it downward, using the experience of the real world,
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where you see volatility declining. This also incorporates the common-sense notion
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that volatility tends to remain the same; that is, tomorrow's volatility is likely to be
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much like today's. Of course, that's a little bit like saying tomorrow's weather is likely
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to be the same as today's (which it is, two-thirds of the time, according to statistics).
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It's just that when a tornado hits, you have to realize that your forecast could be wrong.
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The same thing applies to GARCH volatility projections. They can be wrong, too.
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So, GARCH does not do a perfect job of estimating and forecasting volatility. In
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fact, it might not even be superior, from a strategist's viewpoint, to using the simple
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minimum/maximum techniques outlined in the previous section. It is really best
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geared to predicting short-term volatility and is favored most heavily by dealers in
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currency options who must adjust their markets constantly. For longer-term volatility
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projections, which is what a position trader of volatility is interested in, GAR CH may
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not be all that useful. However, it is considered state-of-the-art as far as volatility pre
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dicting goes, so it has a following among theoretically oriented traders and analysts.
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MOVING AVERAGES
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Some traders try to use moving averages of daily composite implied volatility read
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ings, or use a smoothing of recent past historical volatility readings to make volatility
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estimates. As mentioned in the chapter on mathematical applications, once the com
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posite daily implied volatility has been computed, it was recommended that a
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smoothing effect be obtained by taking a moving average of the 20 or 30 days'
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implied volatilities. In fact, an exponential moving average was recommended,
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because it does not require one to keep accessing the last 20 or 30 days' worth of data
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in order to compute the moving average. Rather, the most recent exponential mov
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ing average is all that's needed in order to compute the next one.
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IMPLIED VOLATILITY
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Implied volatility has been mentioned many times already, but we want to expand on
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its concept before getting deeper into its measure and uses later in this section.
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Implied volatility pertains only to options, although one can aggregate the implied
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volatilities of the various options trading on a particular underlying instrument to
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produce a single number, which is often referred to as the implied volatility of the
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underlying. |