Forecasting yield volatility, Financial Management

Assignment Help:

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.


Related Discussions:- Forecasting yield volatility

Equilibrium of an exchange economy, The economy consists of two consumers, ...

The economy consists of two consumers, A and B. Both consumers are endowed with one unit of good 1 and one unit of good 2. Consumer A is entirely indi?erent between all consumption

Registered and unregistered bonds, On the basis of transferability, d...

On the basis of transferability, debentures can be classified as registered and unregistered debentures. Unregistered debentures (or bearer debentures) are freely

Determining optimum liquid balance, Q. Determining Optimum Liquid Balance? ...

Q. Determining Optimum Liquid Balance? Liquid balance (balance of cash and marketable securities) must be maintained at the optimum level. It is the level which gives the minim

Define minimum price make producers as a whole worse off, Suppose the gover...

Suppose the government regulates the price of a good to be no lower than some minimum level. Can such a minimum price make producers as a whole worse off?  Explain. As a higher

Show example on cross currency swap, 1. Of course a swaption will be needed...

1. Of course a swaption will be needed. The major reasons being that Bond A is callable after 3 years and matures in 4 years whereas Bond B matures in 5 years. It is understandable

Factors determining dividend policy, Q. Factors Determining Dividend Policy...

Q. Factors Determining Dividend Policy? (1) Financial Needs of the Firm: - Financial requirement of a firm are directly related to the investment opportunities available to it.

Beta, Definition of 'Beta' A measure of the volatility or systematic ri...

Definition of 'Beta' A measure of the volatility or systematic risk of a security or a portfolio in difference to the market as a whole. Beta is needed in the capital asset pri

Define the concept of a real option, Define the concept of a real option. D...

Define the concept of a real option. Discuss some real options a firm can be confronted with when investing in real projects. A positive APV project is accepted under the supposi

Annual tax shield, What is the annual tax shield to a firm that has total a...

What is the annual tax shield to a firm that has total assets of $80 million and a net worth of $55 million, if the average interest rate on debt is 8.5% and the marginal tax rate

Evaluate net present value of machine, Kenneth Su Gold Corp (KSGC) is consi...

Kenneth Su Gold Corp (KSGC) is considering the purchase of a new piece of machinery. The new machinery would cost $80,000. You are given the following facts: The new machine

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd