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Traders and Investors Club<br />Asymmetric Volatility and Leverage Effect<br />
Introduction<br />1)  THEORY AND DEFINITIONS<br />2) VOLATILITY PROXY AND LOG-RETURNS<br />3) STOCHASTIC VOLATILITY<br />3...
Leverage Effect<br />1)“ Negative returns seemed to be more important   predictors of volatility than positive returns. La...
Leverage Effect<br />2)”Volatility of stocks tends to increase when the price drops” (F. Black)<br />3)”Negative correlati...
Types of Volatility<br />Actual Historical<br />Volatility over a specified period but with the last observation on a date...
Types of Volatility <br />Actual Future<br />   Volatility over a period starting at the current time and ending at a futu...
Types of Volatility<br />Implied<br />Volatility observed from historical prices of options<br /> (Black-Scholes model)<br />
Types of Volatility<br /> Stochastic Volatility<br />   Tendency of volatility to revert to some long-run mean value (GARC...
Proxy for Volatility<br />True volatility cannot be observed because it is very difficult to separate:<br /> - market-wide...
Log-Normal Returns<br />The log-normally distribution of data allows for a more accurate estimation of the return sensitiv...
Log-Normal Returns<br />Rt = ln (Pt / Pt-1)<br />Where Rt denotes the log - return at time t for the asset  price , Pt den...
Stochastic Volatility<br />GARCH Model: GARCH (Generalised Autoregressive Conditional Heteroskedasticity) it assumes that ...
Stochastic Volatility<br />The GARCH variance is a weighted average of 3 different variables: <br />1) Long run average vo...
Crude Oil Futures Market<br />
News Impact Curve – CL1<br />
Residuals – Crude Oil<br />
Gold Futures Market<br />
News Impact Curve – Gold<br />
Residuals - Gold<br />
FTSE 100<br />
News Impact Curve – FTSE100<br />
Residuals – FTSE100<br />
Euro vs Dollar<br />
News Impact Curve – EurvsDol<br />
Residuals – Euro vs Dollar<br />
VIX<br />
Crude Oil 10 years Impact Curve<br />
Conclusions<br />The analysed markets present strong evidence of leverage effect processes<br />The financial crises “re-s...
Conclusions<br />In leveraged markets returns drop much more quickly than “normal markets”<br />Asymmetric volatility can ...
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Asymmetric Volatility

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Transcript of "Asymmetric Volatility"

  1. 1. Traders and Investors Club<br />Asymmetric Volatility and Leverage Effect<br />
  2. 2. Introduction<br />1) THEORY AND DEFINITIONS<br />2) VOLATILITY PROXY AND LOG-RETURNS<br />3) STOCHASTIC VOLATILITY<br />3A) STOCHASTIC VOLATILITY CHARTS: GOLD,CRUDE OIL,FTSE and EURO vs DOLLAR<br />
  3. 3. Leverage Effect<br />1)“ Negative returns seemed to be more important predictors of volatility than positive returns. Large prices declines forecast greater volatility than similarly large prices increases” (R. Engle)<br />
  4. 4. Leverage Effect<br />2)”Volatility of stocks tends to increase when the price drops” (F. Black)<br />3)”Negative correlation between past returns and future volatility”(J.P. Bouchaud)<br />
  5. 5. Types of Volatility<br />Actual Historical<br />Volatility over a specified period but with the last observation on a date in the past<br />
  6. 6. Types of Volatility <br />Actual Future<br /> Volatility over a period starting at the current time and ending at a future date (options’ expiration date)<br />
  7. 7. Types of Volatility<br />Implied<br />Volatility observed from historical prices of options<br /> (Black-Scholes model)<br />
  8. 8. Types of Volatility<br /> Stochastic Volatility<br /> Tendency of volatility to revert to some long-run mean value (GARCH family models, Chen model, Heston model, etc) <br />
  9. 9. Proxy for Volatility<br />True volatility cannot be observed because it is very difficult to separate:<br /> - market-wide factors (systematic variables) <br /><ul><li>stock-specific factors (idiosyncratic variables). </li></ul>Therefore, log-normal returns are usually employed as a proxy for the true volatility.<br />
  10. 10. Log-Normal Returns<br />The log-normally distribution of data allows for a more accurate estimation of the return sensitivity for a given change in the information set available in the market for any given time period<br />
  11. 11. Log-Normal Returns<br />Rt = ln (Pt / Pt-1)<br />Where Rt denotes the log - return at time t for the asset price , Pt denotes the price at time t whilst Pt-1 represents the price at time t-1.<br />
  12. 12. Stochastic Volatility<br />GARCH Model: GARCH (Generalised Autoregressive Conditional Heteroskedasticity) it assumes that the randomness of variance process varies with variance. <br />
  13. 13. Stochastic Volatility<br />The GARCH variance is a weighted average of 3 different variables: <br />1) Long run average volatility<br />2) Forecasted volatility values calculated in previous period<br />3) New information not available when the previous forecast was made<br />
  14. 14. Crude Oil Futures Market<br />
  15. 15. News Impact Curve – CL1<br />
  16. 16. Residuals – Crude Oil<br />
  17. 17. Gold Futures Market<br />
  18. 18. News Impact Curve – Gold<br />
  19. 19. Residuals - Gold<br />
  20. 20. FTSE 100<br />
  21. 21. News Impact Curve – FTSE100<br />
  22. 22. Residuals – FTSE100<br />
  23. 23. Euro vs Dollar<br />
  24. 24. News Impact Curve – EurvsDol<br />
  25. 25. Residuals – Euro vs Dollar<br />
  26. 26. VIX<br />
  27. 27. Crude Oil 10 years Impact Curve<br />
  28. 28. Conclusions<br />The analysed markets present strong evidence of leverage effect processes<br />The financial crises “re-shaped” many markets that were usually considered NOT TO BE LEVERAGED (Currency markets, Crude Oil , Gold, commodity markets)<br />
  29. 29. Conclusions<br />In leveraged markets returns drop much more quickly than “normal markets”<br />Asymmetric volatility can be used to scale trades and re-enforce short or long positions<br />Asymmetric volatility is often used in options and futures strategies both for speculating and hedging purposes<br />
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