IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Yin-yang volatility in scale space of price-time: a core structure of financial market risk

  • Heping Pan
Registered author(s):

    Purpose–The purpose of this study is to discover and model the asymmetry in the price volatility of financial markets, in particular the foreign exchange markets as the first underlying applications. Design/methodology/approach–The volatility of the financial market price is usually defined with the standard deviation or variance of the price or price returns. This standard definition of volatility is split into the upper part and the lower one, which are termed here as Yang volatility and Yin volatility. However, the definition of yin-yang volatility depends on the scale of the time, thus the notion of scale space of price-time is also introduced. Findings–It turns out that the duality of yin-yang volatility expresses not only the asymmetry of price volatility, but also the information about the trend. The yin-yang volatilities in the scale space of price-time provide a complete representation of the information about the multi-level trends and asymmetric volatilities. Such a representation is useful for designing strategies in market risk management and technical trading. A trading robot (a complete automated trading system) was developed using yin-yang volatility, its performance is shown to be non-trivial. The notion and model of yin-yang volatility has opened up new possibilities to rewrite the option pricing formulas, the GARCH models, as well as to develop new comprehensive models for foreign exchange markets. Research limitations/implications–The asymmetry of price volatility and the magnitude of volatility in the scale space of price-time has yet to be united in a more coherent model. Practical implications–The new model of yin-yang volatility and scale space of price-time provides a new theoretical structure for financial market risk. It is likely to enable a new generation of core technologies for market risk management and technical trading strategies. Originality/value–This work is original. The new notion and model of yin-yang volatility in scale space of price-time has cracked up the core structure of the financial market risk. It is likely to open up new possibilities such as: a new portfolio theory with a new objective function to minimize the sum of the absolute yin-volatilities of the asset returns, a new option pricing theory using yin-yang volatility to replace the symmetric volatility, a new GARCH model aiming to model the dynamics of yin-yang volatility instead of the symmetric volatility, new technical trading strategies as are shown in the paper.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.emeraldinsight.com/journals.htm?issn=2044-1398&volume=2&issue=4&articleid=17047902&show=abstract
    Download Restriction: Cannot be freely downloaded

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Emerald Group Publishing in its journal China Finance Review International.

    Volume (Year): 2 (2012)
    Issue (Month): 2 (August)
    Pages: 377-405

    as
    in new window

    Handle: RePEc:eme:cfripp:v:2:y:2012:i:2:p:377-405
    Contact details of provider: Web page: http://www.emeraldinsight.com

    Order Information: Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
    Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=cfri Email:


    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Sornette, Didier & Johansen, Anders, 1997. "Large financial crashes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 245(3), pages 411-422.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    3. Laurent E. Calvet, 2004. "How to Forecast Long-Run Volatility: Regime Switching and the Estimation of Multifractal Processes," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 49-83.
    4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    5. Beckers, Stan, 1981. "Standard deviations implied in option prices as predictors of future stock price variability," Journal of Banking & Finance, Elsevier, vol. 5(3), pages 363-381, September.
    6. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
    7. Anders Johansen & Didier Sornette, 1999. "Critical Crashes," Papers cond-mat/9901035, arXiv.org.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eme:cfripp:v:2:y:2012:i:2:p:377-405. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.