## Posts Tagged ‘**Markov**’

## Markov Chain for historical volatility

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:

- Less than -25%: denote it as -100.
- From -25% to -15% : -20.
- From -15% to -5% : -10.
- From -5% to 5% : 0.
- From 5% to 15% : 10.
- From 15% to 25% : 20.
- More than 25% : 100.

Advertisements