The right way to calculate volitality

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The right way to calculate volitality

Last comment by - June 2020

The right way to calculate volitality

Asking for confirmation on calculating volatility in QuantConnect using STD function, and if there's a better method.

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The right way to calculate volitality

Travis Fu | July 2015

I know this is sort of basic and should be well addressed, but is there a well defined method to calculate volatility?

This is how I currently do it:

var dailyReturn = ROCP(symbol, 1, Resolution.Daily);

var volitality = STD(symbol, 84).Of(dailyReturn);

I first define a variable called daily return, and calculated 84 days (trading days in 4 months) of standard deviation of it. However it is far from what I manually calculated from the prices. I know the numbers may be not exactly the name (Annualized, not annualized etc.) but the shape of the data curve is totally different. Can anyone confirm if this is the right way to calculate vol in QC? or if there is a better way to do that?

Thank you!

Author

Travis Fu

July 2015

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Jared Broad INVESTOR

QuantConnect | July 2015

There is no one way to calculate volatility from what I've seen. We used the deviation in daily performance over 252 days to calculate the vol for sharpe ratio formulas. If you have a specific case you'd like help with please share an algorithm or refer us to a project-id and we can help.

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Michael Handschuh INVESTOR

July 2015

Hey @Travis, You'll need to give us some more details as to what method you're using to compute it manually. The code as you described will compute the standard deviation of the previous 84 days percentage change. Maybe you should be using log returns instead of ROCP?


    public class LogReturn : WindowIndicator
    {
        public LogReturn(string name, int period)
            : base(name, period)
        {
        }

        public LogReturn(int period)
            : base("LOGR" + period, period)
        {
        }

        protected override decimal ComputeNextValue(IReadOnlyWindow window, IndicatorDataPoint input)
        {
            decimal valuef = input;

            decimal value0 = !window.IsReady 
                ? window[window.Count - 1] 
                : window.MostRecentlyRemoved;

            return (decimal) Math.Log((double) (valuef/value0));
        }
    }

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Travis Fu INVESTOR

July 2015

Hi @MichaelH, Thank you very much for providing this snippet, would you pointing out a way if I want to apply this in the online version of QC? I am sure it is easy to just add this in the indicator class in Lean project on my local machine, but it would be great to know how to extend the capability online. Thank you Travis

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Michael Handschuh INVESTOR

July 2015

Hey @Travis, I've attached an example of creating your own indicator (LogReturn) and registering it for automatic updates. I've also included some code to plot the value. The curve here seems more typical of a volatility curve. I hope this helps!

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Michael Handschuh INVESTOR

July 2015

Here's a comparison of the two techniques. They seem to have similar shape in my tests. Let me know what you guys think.

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Michael Handschuh INVESTOR

July 2015

Hey @Travis, one more thing... It looks like you've named your indicators all the same thing! You pass in 'symbol' as the name of the indicator. I'm not sure how you're generating the plots, but some of the plot helper functions use the name of the indicator for the plot, so if there are multiple indicators with the same name you may end up with very unexpected results. Maybe this is why my recent share above doesn't suffer from the jitter you described. In the future it's easiest for us if you share an algorithm which demonstrates the problem, it will greatly improve our ability to help you. Thanks!

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Travis Fu INVESTOR

July 2015

Hi @MichaelH , Thank you for your replies and suggestions! However, I still have questions about your code, I see your code provided above generate nothing. I am a little confused, clearly you can see the shapes on your machine, but I couldn't see any plot, I just need to compare the plot you generated and compare with the manually calculated vol shape in my excel to confirm Thanks for pointing out the same "symbol" name, actually I have a ticker list, and I just have a loop go through them and variables generated by "symbol" will be passed to the tickers in the list individually. Greatly appreciate your help! Sorry didn't reply promptly, was busy at work, but I will work on this this weekend. Travis

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Michael Handschuh INVESTOR

July 2015

@Travis, did you clone and run the backtest to look at the plots? The chart shown in this thread is the equity chart, which is flat because I didn't place any trades. Clone the algorithm and look at the plots. There's a volatility plot and a returns plot which computes the vol using ROCP and LogReturns indicator I've previously provided.

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John Radosta INVESTOR

June 2020

There are various ways to measure volatility, it just matters if you're trying to estimate current volatility or future volatiltiy, as well as realized or implied volatility. Let's look at the indicator route first.

For current realized volatility, you could certainly use STD (which is essentially also what Bollinger Bands uses), Keltner channels which provide volatilty in absolute pricing with a moving average, or you can even go the statistical arbitrage route if you have asset cointegration, measured by the divergeance between one or more other assets (this is how Renaissance fund is rumored to do it). ATR is also another one if you want just the absolute pricing.

For predicting future realized volatility, you can do that surprisingly accurately using the GARCH method (link to paper is below), but as mentioned in many talks on YouTube, realized volatility is not what ultimately determines asset prices, implied volatility does, and there is no known accurate way to predict future implied volatility. If you find it though, well, you'd be rich :-) Sidenote: this is why options traders are always talking about implied volatility, because implied volatility is a derivative (calculus) of asset price: the underlying asset price is baked into it.

The good news is that the GARCH method has been shown to be a better predictor of future realized volatility than even the VIX, so I'd go that route if you really want to get your hands dirty.

hec.unil.ch/agoyal/docs/Garch.pdf

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Derek Melchin INVESTOR

QuantConnect | June 2020

Hi John,

Thank you for providing a research paper for users to learn more about GARCH models. I noticed the link to the paper returns a 404 error though. Here's a working link for those interested in learning more: www.hec.unil.ch/agoyal/docs/Garch.pdf

Best,
Derek Melchin

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1 person upvoted this

Spacetime INVESTOR

December 2021

AlMoJo ,

Also, if you would like to explore more CBOE data sets, then you can use the Nasdaq Data Link provided below.

Correction in my last post: meant to say CBOE and not Quandl (Quandl was acquired by Nasdaq)

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Spacetime INVESTOR

December 2021

AlMoJo , Just posting our QC CBOE Datasets link below for your reference if you need it.

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Vladimir INVESTOR

December 2021

Spacetime,
There are only 6 trades for SHV in your version of the code.
Can you try changing in the code the VIX and VXV data retrieval in a way like in the attached sample.

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Spacetime INVESTOR

December 2021

Hi Vladimir,

Hmm… not entirely sure why there were only 6 trades executed.

The above backtest which I have attached was taking a “bit” to complete for me and I was engaged with other work, so I ran the above model (shaerd by pangyuteng) with a start date of self.SetStartDate(2020, 11, 1) just to speed up things.

Hmm… I have extended the date range to start from self.SetStartDate(2019, 1, 1) and it does not have too many trades either. (backtest attached)

If you have noticed from the above example shared by pangyuteng , then it does not trade that often either. [ self.SetStartDate(2019, 1, 1) ]

But, the fixes which I have shared above does work as the error which was being received by AlMoJo is no longer occurring.

Hmm… maybe someone else might have a better idea on this, but I will try to look into this further. Hmm… maybe the LSTM configuration needs to be looked into or the volatility data resolution and other resolutions needs to be changed to minute time slice if possible.

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Vladimir INVESTOR

December 2021

Spacetime,

I backtested cloned pangyuteng algorithm with only changes in my_custom_data

url_vix = "http://cache.quantconnect.com/alternative/cboe/vix.csv"
url_vxv = "http://cache.quantconnect.com/alternative/cboe/vix3m.csv"

It generated 13 SPY-SHY trades and metrics as your last one, but the performance is not comparable to pangyuteng's results.

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Spacetime INVESTOR

December 2021

Vladimir,

Hmm… If you want to compare it with pangyuteng's results, then you have to provide an end date of self.SetEndDate(2020, 1, 1) because pangyuteng's model ends around that time. Please note, pangyuteng's post is time stamped somewhere in December 2019.

Try to run it with end date parameter and check to see if performance is comparable.

I have attached a backtest run starting from self.SetStartDate(2019, 1, 1) and ending at self.SetEndDate(2020, 1, 1) and it only traded once.

Hmm…

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Vladimir INVESTOR

December 2021

Spacetime,

I definitely like the metrics from your last backtest, but my attempts to reproduce them for some reason were unsuccessful.

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AlMoJo INVESTOR

Ya1 | May 2022

Hello everybody,

Pangyuteng this is an amazing result. Jack Simonson I also think technical indicators would help a lot.

I tested Pangyuteng version on the 2022 crash and it is not so good at dodging it. I taught maybe going hourly timeframe instead of daily could help even if I know that trading more frequently is not really good.

Anyone has an idea on how to change the timeframe? I tried to pass all the .Daily to .Hourly but obviously it wasn't that simple.

Kind Regards

Upvote

Varad Kabade INVESTOR

May 2022

Hi AlMoJo,

To change the timeframe of the entire algorithm we recommend adding the following to the Initialize method:

self.UniverseSettings.Resolution = Resolution.Minute

Note that the algorithm uses higher frequency bars to create lower-frequency bars. Therefore to use indicators or consolidators at the hourly resolution we need to have the universe at the minute, seconds, or hourly resolution.

Best,

Varad Kabade

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Will Berger INVESTOR

July 2022

Hey Guys and Sherry,

Thanks for this incredible thread. So many interesting ideas!

Will

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