An application of the method of moments to range-based volatility estimation using daily high, low, opening, and closing (HLOC) prices

DOI10.1142/S021902491350026XzbMATH Open1280.91074OpenAlexW2009136082MaRDI QIDQ2853373FDOQ2853373

Authors Cristin Buescu, Fatoumata J. Koné, Michael Taksar

Publication date 21 October 2013

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1112.4534

zbMATH Keywords

method of momentsalgorithmic tradingdaily high, low, opening and closing processrange of arithmetic Brownian motionrange-based volatility estimation

Mathematics Subject Classification ID

Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Applications of stochastic analysis (to PDEs, etc.) (60H30) Stochastic models in economics (91B70)

Abstract: We use the expectation of the range of an arithmetic Brownian motion and the method of moments on the daily high, low, opening and closing prices to estimate the volatility of the stock price. The daily price jump at the opening is considered to be the result of the unobserved evolution of an after-hours virtual trading day.The annualized volatility is used to calculate Black-Scholes prices for European options, and a trading strategy is devised to profit when these prices differ flagrantly from the market prices.

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Cites work

• scientific article; zbMATH DE number 4078444 (Why is no real title available?)
• scientific article; zbMATH DE number 1869203 (Why is no real title available?)
• scientific article; zbMATH DE number 3274494 (Why is no real title available?)
• Estimating correlation from high, low, opening and closing prices
• Estimating variance from high, low and closing prices
• On the maximum drawdown of a Brownian motion
• The Asymptotic Distribution of the Range of Sums of Independent Random Variables

Cited in

(5)

• A new look at variance estimation based on low, high and closing prices taking into account the drift
• Estimating correlation from high, low, opening and closing prices
• A maximum likelihood approach to volatility estimation for a Brownian motion using high, low and close price data
• The economic value of volatility timing using a range-based volatility model
• The Garman-Klass volatility estimator revisited

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