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An application of the method of moments to range-based volatility estimation using daily high, low, opening, and closing (HLOC) prices

Research output: Contribution to journalArticle

Cristin Buescu, Michael Taksar, Fatoumata J. Koné

Original languageEnglish
JournalInternational Journal of Theoretical and Applied Finance
Volume16
Issue number5
DOIs
Publication statusPublished - 20 Dec 2011

Bibliographical note

19 pages, 2 figures

Documents

  • pdf

    1112.4534v1, 164 KB, application/pdf

    10/12/2012

    Submitted manuscript

  • pdf

    kone_v2.pdf, 456 KB, application/pdf

    21/07/2015

    Submitted manuscript

King's Authors

Abstract

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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