Open Grefer opened 4 years ago
The only advantage listed is that the implied volatility model reacts immediately to changing market conditions. Forecast models based on historical data require time to adjust to market events. Disadvantages include the following: (1) implied volatility is model dependent; (2) a major assumption of the model is that asset returns follow a continuous time lognormal diffusion process and are assumed to be constant but that implied volatility varies through time; and (3) implied volatility is biased upward.
Parametric Methods: RiskMetrics®[i.e., exponentially weighted moving average (EWMA) model] Historical Standard Deviation Nonparametric Method: Historical Simulation Hybrid Approach
Fat-tailed asset return distributions are most likely the result of time-varying volatility for the unconditional distribution.
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