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Essay On Volatility

1872 Words8 Pages

INTRODUCTION:
Volatility is one the most important variable in finance. It involves wide categories of theories and application in risk management, derivatives, assets pricing, portfolio theory, financial econometrics and investment derivatives. Because of the nature of volatility as it continuously changes over time this makes the volatility as latent variable i-e variable that cannot be directly measured or observed. Different research and academic methods have adapted to measure volatility. Changes in volatility arises volatility risk.

More recent development is observed by the treatment of volatility which can be packaged in an index like volatility index and traded using volatility derivatives (option ,future and swaps).Volatility derivatives …show more content…

Moore (1966) and Officer (1973) reveal that margin requirements have no effect on the volatility of the stock market. However Hardouvelis (1988) in his shows a significant negative relationship between initial margin requirements on stocks and stock market volatility however his work is being challenged by Hsieh and Miller (1990) find that the relation between margin changes and stock market volatility is consistent with a tendency for the Federal Reserve Board to increase initial margin requirements as a response to increases in the volatility of the stock …show more content…

Particularly, the randomization in time, which is based on a transaction clock, may account for volatility clustering in prices. Furthermore, since the time randomness can be made to specific components (e.g., diffusions or jumps) in various manners, their contributions towards the risks of price changes may be analyzed, which facilitates to conduct a model specification

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