Volatility clustering: Difference between revisions

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Revision as of 06:23, 24 May 2006

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'''Volatility Clustering''' Volatility clustering: as noted by Mandelbrot, “large changes tend to be followed by large changes, of either sign, and small changes tend to be followed by small changes.” A quantitative manifestation of this fact is that, while returns themselves are uncorrelated, absolute returns |rt| or their squares display a positive, significant and slowly decaying autocorrelation function: corr(|rt|, |rt+τ |) > 0 for τ ranging from a few minutes to a several weeks.

Observations of this type in financial time series have led to the use of [[GARCH]] models in financial forecasting and [[derivatives]] pricing. This is a more precise formulation of the intuition that asset [[volatility]] tends to revert to some mean rather than remaining constant or moving in [[monotonic]] fashion over time.

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[[Category:Derivatives]]

[[Category:Stock market]]

[[Category:Technical analysis]]

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