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Church
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Joined: September 4th, 2007, 10:27 am

Implicit autocorrelation in term structure of volatilities

September 23rd, 2011, 6:02 am

Hi,If a volatility term structure is decreasing, it implies a certain autocorrelation of the underlying variable.Does anyone know a simple way of determining the 1-year autocorrelation based on this term structure? Thanks
 
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bwarren
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Joined: February 18th, 2011, 10:44 pm

Implicit autocorrelation in term structure of volatilities

September 23rd, 2011, 6:46 pm

QuoteOriginally posted by: ChurchHi,If a volatility term structure is decreasing, it implies a certain autocorrelation of the underlying variable.ThanksWhy is that?
 
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ronm
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Implicit autocorrelation in term structure of volatilities

September 25th, 2011, 2:35 pm

QuoteIf a volatility term structure is decreasing, it implies a certain autocorrelation of the underlying variable.Are you sure this is always the case? I doubt because, volatility is a second order measure but auto-correlation is linear measure.Regards,
 
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caperover
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Joined: June 25th, 2005, 4:54 pm

Implicit autocorrelation in term structure of volatilities

September 28th, 2011, 1:59 pm

autocorrelation and time-varying instantanous volatility are two ways to achieve a certain vol term structure shape. a decreasing volatility curve does not necessarily imply mean-reversion.If you assume the instantaneous volatility is constant, you can tune your autocorrelation parameter to match your vol term structure shape.