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Resilience of Volatility

  • Sergey S. Stepanov
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    The 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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    File URL: http://arxiv.org/pdf/0911.5048
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    Paper provided by arXiv.org in its series Papers with number 0911.5048.

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    Date of creation: Nov 2009
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    Handle: RePEc:arx:papers:0911.5048
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