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AssetParameters.VolatilityForwardEstimate Method 

Returns the (expected) volatility (i.e. standard deviation) of the returns of an asset given the (discrete) probability distribution of a range of states which may occur and the corresponding returns which each of these states will result in.

public double VolatilityForwardEstimate(
   double[] probability,
   double[] returns
);

Parameters

probability
probability[s] is the probability of the state s occurring. The probabilities here are given in decimal format (i.e. 1 percent = 0.01).
returns
returns[s] is the (absolute or relative percentage terms) return of the asset in the state s. Note that if the absolute (resp. percentage) returns are used then the returned volatility will be expressed in absolute (resp. relative percentage) terms. Moreover, if the daily returns are used then the returned volatility is an estimate of the daily volatility and so on.

Remarks

Further Explanation

This approach to estimating the (future) volatility is particularly applicable when there are a number of alternatively market events which could have a major influence on a given assets price (and hence volatility) and the probability of these events taking place can be reasonably well estimated. In such instances this approach to estimated the future volatility is more appropriate than using a estimate based on recent historical prices.

When should the scenario approach be used?

One such instance is when a takeover of a quoted company has been announced and the share price converges to almost the offer price in anticipation of the takeover being completed. In this scenario the more likely the takeover will be completed the closer the price will converge to the offer price. However, if the takeover breaks down then the price is likely to experience sharp moves to the price level found prior to the intended takeover being announced. By estimating the likely-hood of each scenario and the likely level of volatility resulting we are able to give a realistic forward looking estimate.

See Also

AssetParameters Class | Portfolio Namespace