Whitepaper – Historical vs Implied Volatility
Which one to Use for Computing VaR?Many Risk teams still struggle with improving Risk estimation through various techniques. As part of this helping them in this endeavour, we keep coming up with Research on many of these techniques that can help them. One of our earlier whitepapers, Stabilizing Monte-Carlo VaR, dealt with one such topic. This Whitepaper deals with yet another open question for many Risk teams – Implied or Historical Volatility – Which one to use for computing VaR?
The paper examines back-testing results for 2 commodities – Coffee and Sugar using both Volatilities – Historical (EWMA, lambda as 0.94), and Implied Volatility (ATM near month Option).
What you’ll Read in this Whitepaper:
- How well do Historical and Implied Volatility Calculate VaR?
- Which method gives lesser Outliers?
- Which method traces P&L Changes more closely?
- How does each method fare in low and high volatile periods?
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