Resilience of Volatility
AbstractThe problem of non-stationarity in financial markets is discussed and related to the dynamic nature of price volatility. A new measure is proposed for estimation of the current asset volatility. A simple and illustrative explanation is suggested of the emergence of significant serial autocorrelations in volatility and squared returns. It is shown that when non-stationarity is eliminated, the autocorrelations substantially reduce and become statistically insignificant. The causes of non-Gaussian nature of the probability of returns distribution are considered. For both stock and currency markets data samples, it is shown that removing the non-stationary component substantially reduces the kurtosis of distribution, bringing it closer to the Gaussian one. A statistical criterion is proposed for controlling the degree of smoothing of the empirical values of volatility. The hypothesis of smooth, non-stochastic nature of volatility is put forward, and possible causes of volatility shifts are discussed.
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Date of creation: Nov 2009
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-05 (All new papers)
- NEP-ECM-2009-12-05 (Econometrics)
- NEP-ETS-2009-12-05 (Econometric Time Series)
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