Forecasting yield volatility, Financial Management

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.

Posted Date: 9/10/2012 3:46:53 AM | Location : United States







Related Discussions:- Forecasting yield volatility, Assignment Help, Ask Question on Forecasting yield volatility, Get Answer, Expert's Help, Forecasting yield volatility Discussions

Write discussion on Forecasting yield volatility
Your posts are moderated
Related Questions
What are the benefits of Traditional approach Traditional approach had a very narrow perception and was devoid of an integrated conceptual and analytical framework. It had pre

Importance of Financial Management: Proper finance is the real key to the success of any business enterprise. Without proper finance no business can survive nor can it be expa

Explain how exchange rate fluctuations influence the return from a foreign market measured in dollar terms. Discuss the empirical proof on the effect of exchange rate doubt on the

Brixton Products is considering the purchase of a new $520,000 computer-based entry order system.  The cost of the system will be depreciated on a straight-line basis over its five

What are the Market conditions of cost of capital Security may not be readily marketable when investor wants to sell; or even if a continuous demand for security does exist, p

Q. Define the Constructive Receipt? Constructive Receipt - A taxpayer is considered to have received income even though monies are not in hand, it may have been set aside or ot

Corrective Action: Once budget figures are compared with those actually achieved, and a variance analysis carried out, management can then take steps to correct any problems id

Q. Show Gross Vs net working capital? The distinction between the gross working capital or the net working capital does not in any way undermine the relevance of the concepts o

You work for a small, for-profit health system. Your system is interested in acquiring a Critical Access Hospital (CAH) at a price of $65,000,000. The purchase would be made from r

Q. What do you mean by Account? Account - Formal record which represents, in words, money or other unit of measurement, certainresources, transactions, claims to such resources