Video Friday – Volatility

Here are a couple of short YouTube videos from Bionic Turtle on estimating a GARCH (generalized autoregressive conditional heteroskedasticity) model and the simpler exponentially weighted moving average (EWMA) model.

GARCH models are designed to capture the clustering of volatility illustrated in the preceding post.

Forecast volatility with GARCH(1,1)

The point is that the parameters of a GARCH model are estimated over historic data, so the model can be utilized prospectively, to forecast future volatility, usually in the near term.

EWMA models, insofar as they put more weight on recent values, than on values more distant back in time, also tend to capture clustering phenomena.

Here is a comparison.

EWMA versus GARCH(1,1) volatility

Several of the Bionic Turtle series on estimating financial metrics are worth checking out.

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