FxPaul

Math in finance or vice versa

Posts Tagged ‘experimental

Markov Chain for historical volatility

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In previous post we used Markov Chain to discover a behavior of historical volatility and find out the 3/2 rule for ups and downs of random variable.

Now let’s construct more complicated model with the following volatility changes as states in chain:

  1. Less than -25%: denote it as -100.
  2. From -25% to -15% : -20.
  3. From -15% to -5% : -10.
  4. From -5% to 5% : 0.
  5. From 5% to 15% : 10.
  6. From 15% to 25% : 20.
  7. More than 25% : 100.

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Written by fxpaul

November 22, 2011 at 22:32

Posted in trading math

Tagged with , ,