Real World Equity Calibration: Comparisons of Different Measures of One Month Equity Volatility at the End November 2008
Document ID: 2008-1254
Published on: 1st December 2008
Author: Frederic El Cherif & Steffen Sorensen
Option implied equity volatility increased materially throughout 2008. The high levels are unprecedented for some economies. At Barrie & Hibbert we use a scaled one month option implied volatility to initialize our expected volatility path in our stochastic volatility models. With our assumption on the speed of mean reversion of volatility, the option implied volatility has some impact on the expected level of volatility over a one year projections horizon. This note analyses whether our assumption on the initial level of volatility is inappropriate in the current market conditions. We find that our estimate of initial expected volatility is much in line with other estimators of expected volatility. We will therefore not change our procedure for initializing expected volatility at year end.
