An application of the method of moments to volatility estimation using daily high, low, opening and closing prices

Details An application of the method of moments to volatility estimation using daily high, low, opening and closing prices An application of the method of moments to volatility estimation using daily high, low, opening and closing prices

2011-12-20

arxiv.org/abs/1112.4534v1

Economy

Quantitative Finance

Statistical Finance

19 pages, 2 figures

Scientific paper

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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