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An application of the method of moments to volatility estimation using daily high, low, opening and closing prices

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  • Cristin Buescu
  • Michael Taksar
  • Fatoumata J. Kon'e

Abstract

We 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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  • Cristin Buescu & Michael Taksar & Fatoumata J. Kon'e, 2011. "An application of the method of moments to volatility estimation using daily high, low, opening and closing prices," Papers 1112.4534, arXiv.org.
    • Handle: RePEc:arx:papers:1112.4534
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    References listed on IDEAS

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    1. Chan, Leo & Lien, Donald, 2003. "Using high, low, open, and closing prices to estimate the effects of cash settlement on futures prices," International Review of Financial Analysis, Elsevier, vol. 12(1), pages 35-47.
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