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On Estimation of Volatility of Financial Time Series for Pricing Derivatives
[K odhadu volatility finančních řad při oceňování derivátů]

Author

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  • Michal Černý

Abstract

Estimation of volatility of financial time series plays a crucial role in pricing derivatives. Volatility is often estimated from historical data; however, it is well known that volatility varies in time. We propose a method to choose a suitable length of historical data to estimate contemporary volatility. The method is based on adaptation of a procedure used in statistical quality control - a hypothesis, that data contains a changepoint of volatility, is tested and if the test gives a positive answer, the changepoint is estimated. Then, a period of data where no changepoint is statistically significant is used to estimate contemporary volatility. The approach is illustrated on an analysis of CZK/EUR exchange rates.

Suggested Citation

  • Michal Černý, 2008. "On Estimation of Volatility of Financial Time Series for Pricing Derivatives [K odhadu volatility finančních řad při oceňování derivátů]," Acta Oeconomica Pragensia, Prague University of Economics and Business, vol. 2008(4), pages 12-21.
    • Handle: RePEc:prg:jnlaop:v:2008:y:2008:i:4:id:126:p:12-21
    DOI: 10.18267/j.aop.126
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    Cited by:

    1. Michal Černý & Jan Pelikán, 2012. "A note on imperfect hedging: a method for testing stability of the hedge ratio," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 60(2), pages 45-50.

    More about this item

    Keywords

    Derivative; Black-Scholes model; time series; volatility; changepoint;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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