Exponentially weighted moving average (EWMA)

Mar 30, 2016

methods

This models and predicts the volatility from previous values plus a fraction of the latest return.

$\sigma^2_t = \lambda \sigma^2_{t-1} + (1 - \lambda) u^2_{t-1}$

where $u_t = ln(\frac{S_t}{S_{t-1}})$ is the log return between spot prices.

For the RiskMetrics system λ was set to 0.94.