volatility-modeling
Volatility Modeling
Purpose
Model, forecast, and interpret volatility using time-series models and options-implied measures. This skill covers EWMA and GARCH(1,1) for volatility forecasting, implied volatility extraction, volatility smile/skew/surface construction, the volatility term structure, the realized-vs-implied volatility gap (volatility risk premium), and the VIX index. These tools are foundational for options pricing, risk management, and trading strategy development.
Layer
1b — Forward-Looking Risk
Direction
Prospective
When to Use
- Forecasting future volatility for risk management or position sizing
- Building EWMA or GARCH models to capture volatility clustering and mean reversion
- Extracting implied volatility from option prices using Black-Scholes or other models
- Constructing or interpreting volatility smiles, skews, and surfaces
- Analyzing the volatility term structure across different maturities
- Comparing realized (historical) volatility to implied volatility to assess the volatility risk premium
- Understanding VIX and its relationship to market sentiment and expected risk
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