- Zheng Xiao TCOM
- 104002208-Chapter16-Slidesd
- US Federal Reserve: 199614pap
- Impact of Government Expenditure on Private Investment in Kenya-Very Good
- Output Spss Motivasi
- Basic_TimeSeries.pptx
- prp
- The Laws of Linear Combination
- ANOVA: A Paradigm for Low Power and Misleading Measures of Effect Size?st
- Introduction to Econometrics- Stock & Watson -Ch 13 Slides.doc
- Mba Dcrust Syllabus
- QuantitativeTechniquesInManagement-MB007-Question.docx
- 00 answer key 2fstudent example - the hollywood guessing game
- Correlation
- Solution
- project report
- Macroeconomic Data Analysis
- ITEM ANALYSIS TABLE.doc
- 07 Box Plots, Variance and Standard Deviation
- ultrasonic tomography naptf faa report
- 5Vol79No1
- mgt acc 106 pgs.pdf
- Cointegration and Exchange Market
- 61.pdf
- ultrasonic tomography naptf faa report
- 03Lect5RandomProc
- Tugas Mira AP 4 A
- 10 Chapter 4
- A STUDY ON THE IMPACT OF MOTOR, COGNITIVE, LANGUAGE AND SOCIO-EMOTIONAL DEVELOPMENT OF PRESCHOOL CHILDRENS
- output
- Pi is 0092867417302465
- hertzcasestudy-140804113018-phpapp01
- TCS Smart Manager
- Lead.502.Starbucks.sardelli.final.realone
- hertzcasestudy-140804113018-phpapp01
- Catamaran
- VCPE the HERTZ CORPORATION (a) - Group 8 (Abhishek Verma, Ashish Verma, Chaitra Chandrashekar)
- India Sample Pgs
- Scatter Plot 3 d
- TU202
- Has Bitcoins Bubble Burst
- vitd-high
- The New Digital Economy

Prof. Jayanth R. Varma

**Desmoothing when “smoothing parameter” α is known
**

Smoothing model

Rt = smoothed return at time t

Rt∗ = “true” return

Rt = (1 − α)Rt∗ + αRt−1

Var(R) = (1 − α)2 Var(R∗ ) + α2 Var(R) =

Desmoothing

Rt − αRt−1 = (1 − α)Rt∗ or

Rt − αRt−1

.

Rt∗ =

1−α

(1 − α)2

Var(R∗ )

1 − α2

(1 − α)2

0.04

1

=

= = 0.1111. The true variance is greater than the observed variance by a

2

1−α

0.36

9

factor of 9 while the true standard deviation will be greater by a factor of 3

If α = 0.8,

**How to estimate the smoothing parameter α?
**

Assume market efficiency

In an efficient market (random walk hypothesis), returns should have no serial correlation. In this case,

we should desmooth the observed returns with α equal to the autocorrelation ρ of the observed returns.

This is because if the true return has zero autocorrelation and it is smoothed with smoothing

parameter α, then the autocorrelation ρ of the smoothed return Rt is α.

Cov(Rt , Rt−1 ) = Cov((1 − α)Rt∗ + αRt−1 , Rt−1 ) = α Var(R)

where we use the fact that Rt∗ is uncorrelated with Rs∗ for s < t and is therefore also uncorrelated with

Rs for s < t.

Rt − ρRt−1

We shall let R† denote the series obtained by desmoothing with α = ρ. Rt† =

or

1−ρ

Rt = (1 − ρ)Rt† + ρRt−1 where ρ is the auto correlation of the observed return.

Even if the true return is itself an autoregressive process (the random walk hypothesis is violated), the

series R† is useful because it has zero autocorrelation as seen below.

†

)

Cov(Rt† , Rt−1

=

=

=

**Cov(Rt − ρRt−1 , Rt−1 − ρRt−2 )
**

(1 − ρ)2

1

[Cov(Rt , Rt−1 ) − ρ Cov(Rt , Rt−2 ) − ρ Cov(Rt−1 , Rt−1 ) + ρ2 Cov(Rt−1 , Rt−2 )]

(1 − ρ)2

Var(R)

[ρ − ρ3 − ρ + ρ3 ] = 0

(1 − ρ)2

**where we have used the fact that Cov(Rt , Rt−2 ) = ρ2 (exponential decline of the autocorrelations of
**

higher order for any autoregressive process).

**Replicate the estimated volatility of the asset
**

It is often desired to choose an α to match some estimate of the volatility of the “true” returns. For

example, in case of real estate, the estimated volatility can be half of equities or average of stocks and

bonds or survey expectations of risk relative to equities/bonds. The α required to replicate a desired

volatility can be obtained by trial and error or by solving a non linear equation as shown below.

Rt − αRt−1

Suppose the true return is given by Rt∗ =

for α 6= ρ.

1−α

Rt − αRt−1 = (1 − ρ)Rt† + ρRt−1 − αRt−1 = (1 − ρ)Rt† + (ρ − α)Rt−1 .

1

2. and desmoothing these returns with α = 0. 1 + α2 − 2αρ ∗ Cov(Rt∗ .411 σ† 26.000 σ∗ 12. σ †2 be the variance of the artificial uncorrelated (random walk) series (Rt† ) and σ ∗2 be the variance of the true returns (Rt∗ ). We have get σ ∗2 = + (ρ − α)2 or 2 = = 2 2 2 (1 − α) (1 − ρ) σ (1 − α) 1 + α2 − 2α obtained a non linear equation for α in terms of the known or assumed variances σ 2 and σ ∗2 and the known autocorrelation ρ. Rt−1 − αRt−2 ) (1 − α)2 (ρ − α)σ 2 − (ρ − α)ασ 2 ρ (ρ − α)(1 − αρ) 2 = σ (1 − α)2 (1 − α)2 (ρ − α)(1 − αρ) (1 − α)2 (ρ − α)(1 − αρ) ∗2 σ ∗2 = σ (1 − α)2 1 + α2 − 2αρ 1 + α2 − 2αρ Other Methods of estimating α 1. We t t−1 t (1 − [α)2 1 − ρ2 ] 2 2 2 ∗2 2 2 σ (1 − ρ) (1 − ρ ) σ 1 + α − 2αρ 1 + α − 2αρ .458 ρ 0.750 ρ∗ 0. it is seen that σ = σ .4): σ 9.000 Note: σ is the standard deviation and ρ is the autocorrelation of the observed return series without any desmoothing σ ∗ is the standard deviation and ρ∗ is the autocorrelation of the “true” return series obtained by desmoothing with α = 0.472 σ† 26. This equation can be solved numerically. we may solve for α that maximizes the correlation with listed property (REIT) which is assumed to be free of smoothing biases. 2 .445 ρ† 0. Replicate or maximise correlations to other assets: In case of real estate for example.50 σ † is the standard deviation and ρ† is the autocorrelation of the random walk series obtained by desmoothing with α = ρ.995 σ∗ 12. Numerical Simulation Given below are the results of simulating 5. Since R = (1 − ρ)R + ρR . Rt−1 ) = = = 1 Cov((1 − ρ)Rt† + (ρ − α)Rt−1 .000 returns from a normal distribution with σ = 10 and ρ = 0. the theoretical values using the formulas derived earlier are: σ 10.Var(Rt∗ ) = (1 − ρ)2 Var(Rt† ) + (ρ − α)2 Var(Rt−1 ) (1 − α)2 where we use the fact that Rt† is uncorrelated with Rs† for s < t and is therefore also uncorrelated with Rs for s < t. (ρ − α)(1 − αρ) The autocorrelation of R∗ is as computed below.000 For comparison.756 ρ∗ 0.437 ρ† 0. Replicate professional asset portfolios which are assumed to be efficient: This is a reverse optimization problem to find the α which produce variance and covariance estimates that generate optimal portfolios that are closest to observed portfolios.75.168 ρ 0. We then have (1 − ρ)2 σ †2 + (ρ − α)2 σ 2 (1 − ρ)2 †2 † 2 σ ∗2 = . Let σ 2 denote the variance of the observed smoothed returns (Rt ).

- Zheng Xiao TCOMUploaded bykritimalik1
- 104002208-Chapter16-SlidesdUploaded byyashpandya01
- US Federal Reserve: 199614papUploaded byThe Fed
- Impact of Government Expenditure on Private Investment in Kenya-Very GoodUploaded bywmmahrous
- Output Spss MotivasiUploaded byGianinaGrainne
- Basic_TimeSeries.pptxUploaded byCarina Rios
- prpUploaded byVijayaram Nagarajan
- The Laws of Linear CombinationUploaded bynoelmor
- ANOVA: A Paradigm for Low Power and Misleading Measures of Effect Size?stUploaded byGilmer Solis Sánchez
- Introduction to Econometrics- Stock & Watson -Ch 13 Slides.docUploaded byAntonio Alvino
- Mba Dcrust SyllabusUploaded byDhana Sekar
- QuantitativeTechniquesInManagement-MB007-Question.docxUploaded byAiDLo
- 00 answer key 2fstudent example - the hollywood guessing gameUploaded byapi-376952446
- CorrelationUploaded byPavan Pal
- SolutionUploaded byMuhammad Arham
- project reportUploaded byapi-241606808
- Macroeconomic Data AnalysisUploaded byScott W. Hegerty
- ITEM ANALYSIS TABLE.docUploaded bysohibuladib
- 07 Box Plots, Variance and Standard DeviationUploaded byAlex Childs
- ultrasonic tomography naptf faa reportUploaded byapi-22997377
- 5Vol79No1Uploaded byDivine Grace Burmal
- mgt acc 106 pgs.pdfUploaded byGhettoopressed
- Cointegration and Exchange MarketUploaded bypepepe78
- 61.pdfUploaded bySonia Gupta
- ultrasonic tomography naptf faa reportUploaded byapi-22997377
- 03Lect5RandomProcUploaded byLucky Wu
- Tugas Mira AP 4 AUploaded byguzennari
- 10 Chapter 4Uploaded bykavitachordiya86
- A STUDY ON THE IMPACT OF MOTOR, COGNITIVE, LANGUAGE AND SOCIO-EMOTIONAL DEVELOPMENT OF PRESCHOOL CHILDRENSUploaded byscholarlyresearchj
- outputUploaded byrowenagold

- Pi is 0092867417302465Uploaded byAbhishek Verma
- hertzcasestudy-140804113018-phpapp01Uploaded byAbhishek Verma
- TCS Smart ManagerUploaded byAbhishek Verma
- Lead.502.Starbucks.sardelli.final.realoneUploaded byAbhishek Verma
- hertzcasestudy-140804113018-phpapp01Uploaded byAbhishek Verma
- CatamaranUploaded byAbhishek Verma
- VCPE the HERTZ CORPORATION (a) - Group 8 (Abhishek Verma, Ashish Verma, Chaitra Chandrashekar)Uploaded byAbhishek Verma
- India Sample PgsUploaded byAbhishek Verma
- Scatter Plot 3 dUploaded byAbhishek Verma
- TU202Uploaded byAbhishek Verma
- Has Bitcoins Bubble BurstUploaded byAbhishek Verma
- vitd-highUploaded byAbhishek Verma
- The New Digital EconomyUploaded byAbhishek Verma