Monthly Archives: July 2009

Stochastic Volatility Models

From: Collector’s Blog | July 08, 2009 Every stochastic volatility model assumes yes stochastic volatility. All the stochastic volatility models I have looked into however assume constant volatility of volatility. Empirical research (mostly unpublished) shows the volatilRead more at Collector’s … Continue reading

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Using Volatility to Predict Market Direction

Although asset returns are essentially unforecastable, the same is not true for asset return signs (i.e. the direction-of-change). As long as expected returns are nonzero, one should expect sign dependence, given the overwhelming evidence of volatility dependence. Even in assets where expected returns are zero, sign dependence may be induced by skewness in the asset returns process. Hence market timing ability is a very real possibility, depending on the relationship between the mean of the asset returns process and its higher moments.
Empirical tests demonstrate that sign dependence is very much present in actual US equity returns, with probabilities of positive returns rising to 65% or higher at various points over the last 20 years. A simple logit regression model captures the essentials of the relationship very successfully Continue reading

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