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Haskell Financial Data Modeling and Predictive Analytics by Pavel Ryzhov

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Forecasting volatility

Besides estimation, volatility forecasting is the next big task in trading. It is obviously a hard task that nobody has solved and won't be able to solve but we can make some estimates and bets in future. So, in fact, we might predict an approximate form of volatility distribution.

One such method lies in the observation that prices exhibit time volatility clustering. There are periods of high volatility, swings followed by calm times. In other words, time series has a memory effect in volatility, therefore, the first approach is to split return residuals into a stochastic piece Forecasting volatility and a time-dependent deviation :

The random variable ...

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