[R-SIG-Finance] A question on volatility

[Adrian Trapletti]

Hi Megh,

As a practitioner I would use something like

x1 <- get.hist.quote(instrument = "^gspc", start = "1990-01-01")
x2 <- get.hist.quote(instrument = "^dji", start = "1990-01-01")  ## both 
need to be synchronized in time

r1 <- log(x1[, 2])-log(x1[, 3]) ## range as proxy for vola
r2 <- log(x2[, 2])-log(x2[, 3]) ## not ()^2 to avoid possibly non-finite 
fourth moment

r <- merge(r1, r2)

plot(r)

rcor <- rollapply(r, width = 250, FUN = function(z) cor(z[, 1], z[, 2], 
method = "pearson"),
                  by.column = FALSE, align = "left") ## method != 
"pearson" for rank correlations

plot(rcor)

as a starting point. As a next step I would use a better proxy for vola 
from the zoo of realized vola based estimators.

Best regards
Adrian

> Dear all, I was trying to understand the correlation among the?volatilities?in different financial market, however am in dilemma what could be the rightful and acceptable-to-everyone approach. I thought to estimate the volatilities of?individual?markets using some GARCH modeling, then just calculate the correlation coefficient on the estimated time series of estimated daily volatilities.?
>
> Is it correct approach to understand the correlation? Can somebody point me any online paper or any idea on the same?
>
> Thanks for your time.

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Dr. Adrian Trapletti
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