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Haskell Financial Data Modeling and Predictive Analytics by Pavel Ryzhov

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Alternative volatility estimators

Though the volatility definition is pretty simple, it has a major drawback. It is a very poor estimate for small sample sizes. If the underlying process is log normal, then variance of the estimated variance is given approximately as follows:

Alternative volatility estimators

So using more data we would get a closer estimate of the true process. Even if it is completely fine for stationary, unchanging processes, it is quite problematic for financial markets. If we use very less data, then our estimate is quite noisy. Using too much data gives an estimate irrelevant to the current market state. Choosing the right balance is quite an art and it is ...

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