 | Volatility and Correlation
November 1-5, 2010 • TIM BOLLERSLEV
The past few years have witnessed unprecedented variations in asset prices within and across most financial markets, highlighting the need for accurate and reliable volatility and correlation measurement, modeling, and forecasting procedures. This course surveys the most prominent volatility and correlation techniques developed over the past two decades, along with their many practical uses ranging from asset and option pricing, portfolio allocation, risk measurement and management, to direct volatility and correlation trading. The discussion is designed to strike a balance between intuition and mathematical rigor and also includes consideration of practical computational issues illustrating the different procedures.
Objectives: The course develops an appreciation and understanding of the importance of time-varying volatility and correlation in financial asset returns, the tools and techniques of modern financial volatility and correlation measurement, modeling and forecasting, as well as the pitfalls and opportunities that arise as the new technologies move forward.
Target audience: Professionals in the financial services industry from a variety of backgrounds, including risk management, portfolio management, trading, regulation, derivatives valuation and research, consulting, as well as financial engineers, economists, managers and statisticians who wish to understand and use cutting-edge volatility and correlation models. The course is self-contained, but some mathematical and statistical maturity is expected.
Fees: The fee for this course is CHF 6’500 (incl. VAT). This covers tuition, extensive course material (including pre-course readings), lunches and an official cocktail and dinner.
Key topics: Time-varying volatilities and correlations; GARCH and stochastic volatility models; market risk; high-frequency data and realized volatilities; options implied volatilities and the VIX; volatility trading; macroeconomic and financial forecasting.
Accreditation: CFA 36 CE credits
COURSE CONTENT
Monday
- Who uses volatility models and why? Risk measurement and management; portfolio choice; asset allocation; asset pricing; hedging; speculation; market timing; forecasting.
- Financial asset return data: Unconditional and conditional return distributions; measures of volatility; volatility clustering; fat tails; jumps; high, mid and low-frequency return distributions; calendar effects; macro-economic news announcement effects.
Tuesday
- ARCH and GARCH models: Basic structures and properties; ARMA representations; time-varying volatility and prediction; volatility timing; volatility scaling; RiskMetricsTM and exponential smoothing; maximum likelihood estimation and testing.
- Variations on GARCH models: Volatility asymmetry and leverage effects; time-varying risk premia; non-normal error distributions and Value at Risk; long-memory models; component structures; regime switching models; software review.
Wednesday
- Multivariate volatility models and correlations: Covariance risk and diversification; commonalities in volatilities; multivariate GARCH and exponential smoothing; factor structures; dynamic correlation models; asymmetries in correlations; copulas.
- Skewness, VaR and extreme value theory: Skewness, kurtosis, and higher order dependencies; GARCH-based VaR and bootstrap techniques; catastrophic risk; extreme value theory.
Thursday
- High-frequency data and volatility modeling: Continuous-time models; practical date considerations; spreads; discreteness; non-synchronous trading; intraday patterns; duration models.
- Realized volatility: Theory of realized volatility; practical construction; volatility signature plots; distributional properties; realized volatility forecasting; return distributions and VaR; jumps; realized CAPM betas and factor loadings.
Friday
- Stochastic volatility models: Basic structures and properties; state space representations; estimation strategies; filtering and forecasting; information arrivals and time deformation; stochastic volatility models versus GARCH.
- Option pricing and implied volatilities: Model-based versus market-based volatilities; general principles of option pricing; Black-Scholes implied volatilities; volatility smiles; risk-neutral distributions; model-free implied volatilities and VIX; volatility trading and variance swaps; variance risk premia and return predictability.
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