An application of the method of moments to volatility estimation using daily high, low, opening and closing prices
AbstractWe use the expectation of the range of an arithmetic Brownian motion and the method of moments on the daily high, low, opening and closing prices to estimate the volatility of the stock price. The daily price jump at the opening is considered to be the result of the unobserved evolution of an after-hours virtual trading day.The annualized volatility is used to calculate Black-Scholes prices for European options, and a trading strategy is devised to profit when these prices differ flagrantly from the market prices.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1112.4534.
Date of creation: Dec 2011
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-03 (All new papers)
- NEP-ECM-2012-01-03 (Econometrics)
- NEP-ETS-2012-01-03 (Econometric Time Series)
- NEP-MST-2012-01-03 (Market Microstructure)
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