Sunday, June 15, 2008

Estimate Historical Volatility

Here is the MATLAB code that one could use to estimate historical volatility using different methods

Historical Close-to-Close volatility
Historical High Low Parkinson Volatility
Historical Garman Klass Volatility
Historical Garman Klass Volatility modified by Yang and Zhang
Historical Roger and Satchell Volatility
Historical Yang and Zhang Volatility
Average of all the historical volatilities calculated above


function vol = EstimateVol(O,H,L,C,n)
% Estimate Volatility using different methods
% EstimateVol(O,H,L,C)gives an estimate of volatility based on Open, High,
% Low, Close prices.
% INPUTS:
% O--Open Price
% H--High Price
% L--Low Price
% C--Close Price
% n--Number of historical days used in the volatility estimate
% OUTPUT:
% Vol is a structure with volatilities using different methods.
% hccv -- Historical Close-to-Close volatility
% hhlv -- Historical High Low Parkinson Volatility
% hgkv -- Historical Garman Klass Volatility
% hgkvM -- Historical Garman Klass Volatility modified by Yang and Zhang
% hrsv -- Historical Roger and Satchell Volatility
% hyzv -- Historical Yang and Zhang Volatility
% AVGV -- Average of all the historical volatilities calculated above
% web: http://www.sitmo.com
try
OHLC = [O H L C];
catch %#ok
error('O H L C must be of the same size');
rethrow(lasterror);
end
if(n<=length(O))
fh = @(x) x(length(x)-n+1:end);
else
error('n should be less than or equal to the length of the prices')
end
open = fh(O); %O(length(O)-n+1:end);
high = fh(H); %H(length(H)-n+1:end);
low = fh(L); %L(length(L)-n+1:end);
close = fh(C); %C(length(C)-n+1:end);
Z = 252; %Number of trading Days in a year

vol.hccv = hccv();
vol.hhlv = hhlv();
vol.hgkv = hgkv();
vol.hgkvm = hgkvM();
vol.hrsv = hrsv();
vol.hyzv = hyzv();
vol.AVGV = mean(cell2mat(struct2cell(vol)));

function vol1 = hccv()
% historical close to close volatility
%Historical volatility calculation using close-to-close prices.

r = log(close(2:end)./close(1:end-1));
rbar = mean(r);
vol1 = sqrt((Z/(n-2)) * sum((r - rbar).^2));
end

function vol2 = hhlv()
%The Parkinson formula for estimating the historical volatility of an
%underlying based on high and low prices.

vol2 = sqrt((Z/(4*n*log(2))) * sum((log(high./low)).^2));
end

function vol3 = hgkv()
% The Garman and Klass estimator for estimating historical volatility
% assumes Brownian motion with zero drift and no opening jumps
%(i.e. the opening = close of the previous period). This estimator is
% 7.4 times more efficient than the close-to-close estimator.

vol3 = sqrt((Z/n)* sum((0.5*(log(high./low)).^2) - (2*log(2) - 1).*(log(close./open)).^2));

end

function vol4 = hgkvM()
%Yang and Zhang derived an extension to the Garman Glass historical
%volatility estimator that allows for opening jumps. It assumes
%Brownian motion with zero drift. This is currently the preferred
%version of open-high-low-close volatility estimator for zero drift
%and has an efficiency of 8 times the classic close-to-close estimator.
%Note that when the drift is nonzero, but instead relative large to the
%volatility, this estimator will tend to overestimate the volatility.

vol4 = sqrt((Z/n)* sum((log(open(2:end)./close(1:end-1))).^2 + (0.5*(log(high(2:end)./low(2:end))).^2) - (2*log(2) - 1)*(log(close(2:end)./open(2:end))).^2));
end

function vol5 = hrsv()
%The Roger and Satchell historical volatility estimator allows for
%non-zero drift, but assumed no opening jump.

vol5 = sqrt((Z/n)*sum((log(high./close).*log(high./open)) + (log(low./close).*log(low./open))));
end

function vol6 = hyzv()
%Yang and Zhang were the first to derive an historical volatility
%estimator that has a minimum estimation error, is independent of
%the drift, and independent of opening gaps. This estimator is
%maximally 14 times more efficient than the close-to-close estimator.
%It can be interpreted as a weighted average of the Rogers and Satchell
%estimator, the close-open volatility and the open-close volatility.
%The performance degrades to the classic close-to-close estimator when
%the price process is heavily dominated by opening jumps.
muO = (1/n)*sum(log(open(2:end)./close(1:end-1)));
sigmaO = (Z/(n-1)) * sum((log(open(2:end)./close(1:end-1)) - muO).^2);
muC = (1/n)*sum(log(close./open));
sigmaC = (Z/(n-1)) * sum((log(close./open) - muC).^2);
sigmaRS = hrsv();
sigmaRS = sigmaRS^2;
k = 0.34/(1+((n+1)/(n-1)));

vol6 = sqrt(sigmaO^2+(k*sigmaC^2)+((1-k)*(sigmaRS)));

end
end




3 comments:

TradingwithMatlab said...

Hi,

Thanks. I will be in touch.

Juan Diego said...

Hi there
I believe there are some mistakes for the Yang Zhang estimator. When checking the formula at Sitmo, I see in your code that u use sigmaO and sigmaC as standard deviations but these are variances, that can be afterwards be summed up together. Hence you should have varO and varC as variable names and more important they should not be squared at the end.

In Summary:
vol6 = sqrt(sigmaO^2+(k*sigmaC^2)+((1-k)*(sigmaRS)));
is incorrect I believe
vol6 = sqrt(sigmaO+k*sigmaC+((1-k)*(sigmaRS)));
is correct but I would also change sigmaO and sigmaC by varO and varC.

Regards

Federico Simon said...

Yes, there are a couple mistakes in Yang & Zhang. The one identified by Juan Diego is not the only one.