components of volatility and their empirical measures
DESCRIPTION
Components of Volatility and their Empirical Measures. DIPANKOR COONDOO Economic Research Unit, Indian Statistical Institute, Kolkata PARAMITA MUKHERJEE Monetary Research Project, ICRA Limited, Kolkata. Notions of Volatility. - PowerPoint PPT PresentationTRANSCRIPT
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Components of Volatility and their Components of Volatility and their Empirical MeasuresEmpirical Measures
DIPANKOR COONDOODIPANKOR COONDOO
Economic Research Unit, Indian Statistical Institute, Kolkata
PARAMITA MUKHERJEEPARAMITA MUKHERJEE
Monetary Research Project, ICRA Limited, Kolkata
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Notions of Volatility
Of Financial Analysts:Variability of a financial
variable as measured by its
Std. Dev.
Of Econometricians:Conditional Heteroskedasticity
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Other Related Issues
Historical Volatility - Non Parametric Measure
Stochastic Volatility - GARCH-based Parametric Analysis
Changing Volatility - Rolling Sample Measure – Can be examined both in
Historical & Stochastic Set up
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What led to what I talk about here?
1. Non-comparability of volatility of variables measured in different units
2. Basis for comparison of the Volatilities of FIIN to India and BSE return, say
3. Are there different aspects of volatility that need to be compared?
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Three Components of Volatility
Strength : Range of Amplitude of Fluctuation due to Volatility
Duration : Portion of Time the Variable is in Volatile State
Persistence: Inertia of large and small fluctuations
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Strength of Volatility
Green has less strength than Blue
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Duration of Volatility
Volatile State Normal State
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Persistence of Volatility
Blue is more persistent than Black
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The Decomposition Methodology
Given Series has trend and volatility An ARIMA with GARCH error will fit well
Step 1: Fit ARIMA. Get the residuals e(t), T = 1, T. Standardise these residuals as w(t) = abs (e(t)/s), t = 1,T, where s = std. dev(e(t),t = 1,t)
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Note that w(t) is non-negative, by construction.
Step 2: Estimate the PDF of w(t). We used non-parametric kernel method of density estimation of Silverman (1986). For every observed value of w, the ordinate of the estimated PDF is
1
1ˆ ( ) [( ) / ].
[.] : kernel function, ( ) 1
: bandwidth or smoothing parameter
T
T tt
f w K w w hT h
K K u du
h
The Decomposition Methodology
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Step 3. Find mode of . Call it .
ˆAlso find mean of and call it .
: average amplitude in nonvolatile state
ˆ: average amplitude in volatile state
ˆStrength :
Duration: 1 ( )
where ( ):
w w
w w w
w
w
S w w
D F w
F w
a measure of portion of sample
period the variable is in volatile state
Persistence: a measure of autocorrn of P w
The Decomposition Methodology
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Table 1: Summary Descriptive Statistics
BRET CMR FIIN
Mean -0.00004 8.38 34.07
Median 0.00092 8.03 23.10
Max 0.09 22.50 983.20
Min -0.07 0.50 -509.50
Std. Dev. 0.02 2.10 120.04
Skewness -0.07 2.58 0.76
Kurtosis 5.33 13.99 9.66
Jarque-Bera 190.15 5160.66 1632.13
Sample Size 840 840 840
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BRET CMR FIINADF-statistic -16.48 -7.73 -9.11
5% Critical Value -1.94 -3.97 -2.87
Model Selected No trend or intercept
Trend and intercept
Intercept
lag order 2 3 4
Table 2: Results of Unit Root Tests
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item
Coefficient Std. Error Coefficient Std. Error Coefficient Std. Error
mean equation
intercept 0.000723 0.000592 7.990946 0.025773 24.63928 2.921969
variance equation
intercept 4.56E-05 9.87E-06 0.196689 0.012257 274.2189 61.64922
ARCH(1) 0.161038 0.036078 1.08646 0.059423 0.124378 0.013505
GARCH(1) 0.713714 0.052307 0.144736 0.019215 0.863543 0.014828
Adjusted R2 -0.005257 -0.03849 -0.00979
BRET CMR FIIN
Table 3: Results of GARCH (1,1) Estimation
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0.00
0.20
0.40
0.60
0.80
1.00
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00
FIIN Density
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0.00
0.20
0.40
0.60
0.80
1.00
0.00 1.00 2.00 3.00 4.00 5.00 6.00
BRET Density
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Table 4. Variable-specific Estimates of Volatility Components Based on Entire Sample
BRET CMR FIIN
Amplitude of FluctuationAverage Amplitude Normal Phase( ) 0.295 0.133 0.256
Average Amplitude Volatile Phase ( ) 0.987 0.847 0.929 Strength of Volatility (S) 0.692 0.714 0.673
Duration of VolatilityProportion of Volatile Days (D) 0.773 0.807 0.769
Persistence of Volatility (P)1st Order Autocorrelation of w 0.25 0.51 0.22
2ndOrder Autocorrelation of w 0.18 0.36 0.20
3rdOrderAutocorrelation of w 0.11 0.25 0.20
w*w
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Volatility Component
Window-width
Mean/CV
BRET CMR FIIN15-day mean 0.66 0.67 0.63
cv 0.51 1.12 0.5190-day mean 0.68 0.75 0.65
cv 0.22 0.54 0.33Entire sample 0.692 0.714 0.67315-day mean 0.6 0.72 0.63
cv 0.23 0.12 0.1790-day mean 0.7 0.79 0.71
cv 0.09 0.05 0.06Entire sample 0.773 0.807 0.76915-day mean -0.01 0.24 -0.01
cv -47.31 0.91 -15.7890-day mean 0.2 0.45 0.08
cv 0.67 0.33 1.54Entire sample 0.25 0.51 0.22
Variable
S
D
P
Table 5: A Summary of Rolling Sample Estimation Returns
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0
1
2
3
4
5
6
7
1 32
63
94
12
5
15
6
18
7
21
8
24
9
28
0
31
1
34
2
37
3
40
4
43
5
46
6
49
7
52
8
55
9
59
0
62
1
65
2
68
3
71
4
74
5
77
6
80
7
BRET
CMR
FIIN
Note: Scales shifted for BRET and CMR
S Measure for 15-day Window Width
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0.25
0.45
0.65
0.85
1.05
1.25
1.45
1.65
1.85
2.05
2.25
1
33
65
97
12
9
16
1
19
3
22
5
25
7
28
9
32
1
35
3
38
5
41
7
44
9
48
1
51
3
54
5
57
7
60
9
64
1
67
3
70
5
73
7
76
9
80
1
BRET CMR FIINNote: Scales shifted for BRET and CMR
D Measure for 15-day Window Width
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-1
-0.5
0
0.5
1
1.5
2
2.5
3
1 27 53 79 105
131
157
183
209
235
261
287
313
339
365
391
417
443
469
495
521
547
573
599
625
651
677
703
729
755
781
807
BRET CMR FIIN
Dotted lines are shifted scales for respective variables
P Measure for 15-day Window Width
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0.25
0.5
0.75
1
1.25
1.5
1.75
2
2.25
2.5
2.75
1 33
65
97
12
9
16
1
19
3
22
5
25
7
28
9
32
1
35
3
38
5
41
7
44
9
48
1
51
3
54
5
57
7
60
9
64
1
67
3
70
5
73
7
BRET CMR FIIN
S Measure for 90-day Window Width
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0.5
0.6
0.7
0.8
0.9
1
1.1
1 33 65 97
129
161
193
225
257
289
321
353
385
417
449
481
513
545
577
609
641
673
705
737
BRET CMR FIIN
Note: Scale shifted for BRET
D Measure for 90-day Window Width
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-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1 29
57
85
11
3
14
1
16
9
19
7
22
5
25
3
28
1
30
9
33
7
36
5
39
3
42
1
44
9
47
7
50
5
53
3
56
1
58
9
61
7
64
5
67
3
70
1
72
9
BRET_90 CMR_90 FIIN 90
Dotted lines are shifted scales for respective variables
P Measure for 90-day Window Width
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Correlation between day to day variations of estimated volatility components for different pairs of variables
Volatility component
Window-width
BRET-CMR BRET-FIIN CMR-FIIN15-day -0.02 0.23 0.0690-day 0.43 0.51* 0.2515-day -0.34 0.05 0.0690-day -0.38 0.23 0.1915-day -0.12 0.07 0.0590-day -0.23 -0.16 0.42
S
D
P
Correlation for the variable-pair
Table 6:
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BRET_S15=C(1)+C(2)*BRET_S15LAG1+C(3)*BRET_S15LAG2
+C(4)*BRET_SD15LAG1Coefficient Std. Error t-Statistic Prob.
C(1) 0.040277 0.011506 3.500639 0.0005
C(2) 0.949454 0.036686 25.8806 0
C(3) -0.045665 0.035586 -1.283214 0.1998
C(4) 0.025349 0.020244 1.252201 0.2109Adjusted R-squared 0.86514
Durbin-Watson stat 1.985785
Component-wise Forecast : Strength
Table 7A:
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BRET_D15=C(1)+C(2)*BRET_D15LAG1+C(3)*BRET_D15LAG2
+C(4)*BRET_SD15LAG1Coefficient Std. Error t-Statistic Prob.
C(1) 0.124057 0.016135 7.688657 0
C(2) 0.677629 0.034416 19.68965 0
C(3) 0.133242 0.034411 3.872083 0.0001
C(4) -0.010605 0.007934 -1.336662 0.1817Adjusted R-squared 0.621627
Durbin-Watson stat 2.007996
Component-wise Forecast :Duration
Table 7B:
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BRET_P15=C(1)+C(2)*BRET_P15LAG1+C(3)*BRET_P15LAG2
+C(4)*BRET_SD15LAG1Coefficient Std. Error t-Statistic Prob.
C(1) -0.017607 0.009949 -1.769719 0.0771
C(2) 1.039735 0.034724 29.94281 0
C(3) -0.157909 0.034455 -4.583119 0
C(4) 0.018263 0.010017 1.823169 0.0686Adjusted R-squared 0.824973
Durbin-Watson stat 2.005559
Component-wise Forecast : Persistence
Table 7C:
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BRET_SD15 Regressed onCoefficient Std. Error t-Statistic Prob.
Constant 0.182372 0.017221 10.58988 0
BRET_S15 0.290415 0.016038 18.10794 0
BRET_D15 -0.252909 0.024861 -10.17302 0
BRET_P15 0.011946 0.011538 1.035377 0.3008
BRET_SD15Lag1 0.812226 0.033928 23.9396 0
BRET_SD15Lag2 -0.051401 0.029838 -1.722664 0.0853
R-squared 0.960513 Mean dependent var 0.925065
Adjusted R-squared 0.960271 S.D. dependent var 0.375287
S.E. of regression 0.074802 Akaike info criterion -2.340672
Sum squared resid 4.571429 Schwarz criterion -2.306313
Log likelihood 969.1867 F-statistic 3974.679
Durbin-Watson stat 1.548439 Prob(F-statistic) 0
Non-parametric Volatility explained by three components
Table 8A:
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Forecast Model:
BRET_SD15=C(1)+C(2)*BRET_S15+C(3)*BRET_D15+C(4)*BRET_P15+C(5)*BRET_SD15LAG1+C(6)*BRET_SD15LAG2
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
0.010
0.012
0.014
0.016
0.018
0.020
0.022
0.024
0.026
0.028
0.030
BRET_SD15 BRET_SD15Forecast GarchVolBRET_MA15
Forecast Model
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CMR_SD15 Regressed onCoefficient Std. Error t-Statistic Prob.
Constant 0.212444 0.032426 6.551635 0CMR_S15 0.453337 0.014953 30.31661 0CMR_D15 -0.265469 0.046262 -5.738427 0CMR_P15 0.001537 0.0182 0.084428 0.9327CMR_SD15Lag1 0.664036 0.030368 21.86596 0CMR_SD15Lag2 -0.133352 0.023436 -5.690007 0
R-squared 0.976942 Mean dependent var 0.68998Adjusted R-squared 0.976801 S.D. dependent var 0.706518S.E. of regression 0.107611 Akaike info criterion -1.613324Sum squared resid 9.460969 Schwarz criterion -1.578964Log likelihood 669.8826 F-statistic 6923.154Durbin-Watson stat 1.023739 Prob(F-statistic) 0
Non-parametric Volatility explained by three components
Table 8B:
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FIIN_SD15 Regressed onCoefficient Std. Error t-Statistic Prob.
Constant 0.183537 0.017932 10.23524 0FIIN_S15 0.398881 0.020162 19.78417 0FIIN_D15 -0.283178 0.026796 -10.56775 0FIIN_P15 0.003833 0.011566 0.331404 0.7404FIIN_SD15Lag1 0.721912 0.032756 22.03913 0FIIN_SD15Lag2 -0.021108 0.028928 -0.729696 0.4658
R-squared 0.976067 Mean dependent var 0.85531Adjusted R-squared 0.975921 S.D. dependent var 0.424477S.E. of regression 0.065868 Akaike info criterion -2.595044Sum squared resid 3.540332 Schwarz criterion -2.560652Log likelihood 1072.563 F-statistic 6655.9Durbin-Watson stat 1.443571 Prob(F-statistic) 0
Non-parametric Volatility explained by three components
Table 8C:
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BRET_SD15 Regressed onCoefficient Std. Error t-Statistic Prob.
Constant 0.057006 0.021796 2.615513 0.0091BRET_S15 Lag1 0.065216 0.021957 2.970124 0.0031BRET_D15 Lag1 -0.055691 0.031278 -1.780506 0.0754BRET_P15 Lag1 0.06902 0.030397 2.270634 0.0234BRET_SD15Lag1 0.927875 0.018618 49.83784 0BRET_P15 Lag2 -0.103754 0.030054 -3.452256 0.0006
R-squared 0.944372 Mean dependent var 0.925065Adjusted R-squared 0.944032 S.D. dependent var 0.375287S.E. of regression 0.088784 Akaike info criterion -1.99796Sum squared resid 6.440066 Schwarz criterion -1.9636Log likelihood 828.1604 F-statistic 2773.982Durbin-Watson stat 1.793371 Prob(F-statistic) 0Residual SeriesJarque-Bera 6770.647Probability 0.0000
Non-parametric Volatility Forecasting Model
Table 9A:
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CMR_SD15 Regressed onCoefficient Std. Error t-Statistic Prob.
Constant 0.539725 0.077949 6.924074 0CMR_S15Lag1 0.81667 0.035396 23.07214 0CMR_D15Lag1 -0.305795 0.142694 -2.143016 0.0324CMR_S15Lag2 0.094666 0.035166 2.691998 0.0072CMR_D15Lag3 -0.329692 0.141923 -2.323039 0.0204
R-squared 0.878311 Mean dependent var 0.687053Adjusted R-squared 0.877716 S.D. dependent var 0.701938S.E. of regression 0.245462 Akaike info criterion 0.034716Sum squared resid 49.2256 Schwarz criterion 0.063376Log likelihood -9.268205 F-statistic 1474.213Durbin-Watson stat 0.992321 Prob(F-statistic) 0Residual SeriesJarque-Bera 11381Probability 0.0000
Non-parametric Volatility Forecasting Model
Table 9B:
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FIIN_SD15 Regressed onCoefficient Std. Error t-Statistic Prob.
Constant 0.066596 0.019491 3.416721 0.0007FIIN_S15 Lag3 0.080775 0.031703 2.547885 0.011FIIN_S15 Lag4 -0.103597 0.0295 -3.511783 0.0005FIIN_D15 Lag6 -0.072937 0.028755 -2.536479 0.0114FIIN_SD15 Lag1 0.993259 0.015763 63.01025 0
R-squared 0.965969 Mean dependent var 0.856792Adjusted R-squared 0.965801 S.D. dependent var 0.4249S.E. of regression 0.078577 Akaike info criterion -2.243394Sum squared resid 5.01968 Schwarz criterion -2.214624Log likelihood 922.5482 F-statistic 5769.176Durbin-Watson stat 1.978857 Prob(F-statistic) 0Jarque-Bera 2653.505Probability 0.0000
Non-parametric Volatility Forecasting Model
Table 9C:
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BRET
0.00
0.30
0.60
0.90
1.20
1.50
1.80
2.10
1 32 63 94 125
156
187
218
249
280
311
342
373
404
435
466
497
528
559
590
621
652
683
714
745
776
807
Obs
erve
d
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2.2
Fore
cast
BRET_SD15Observed BRET_SD15Forecast
BRET
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CMR
0.00
0.50
1.00
1.50
2.00
2.50
3.00
1 32 63 94 125 156 187 218 249 280 311 342 373 404 435 466 497 528 559 590 621 652 683 714 745 776 807
CMR_SD15Observed
CMR_SD15Forecast
CMR
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FIIN
0.15
0.65
1.15
1.65
2.15
1 31 61 91 121
151
181
211
241
271
301
331
361
391
421
451
481
511
541
571
601
631
661
691
721
751
781
811
Obs
erve
d
0
0.5
1
1.5
2
2.5
Fore
cast
FIIN_SD15Observed
FIIN_SD15Forecast
FIIN