Inside Volatility Filtering: Secrets of the Skew, 2nd Edition

"While e-trading typically starts with cash instruments and vanilla securities, it is inevitable that it will eventually encompass trading activities that lean heavily on quantitative elements such as volatility trading. As a result, the Second Edition of this book serves its intended audience well, providing an up-to-date, comprehensive review of the application of filtering techniques to volatility forecasting. While the title of each chapter is framed as a problem, the contents of each chapter represent our best guess at the answer. Employing the advances that econometricians have made in the past quarter century, the fraction of variance explained is a truly impressive accomplishment."
—From the Foreword by Peter Carr, Global Head of Market Modeling, Morgan Stanley; and Executive Director, Masters in Math Finance Program, Courant Institute, New York University

The New, More Accurate Take on the Classical Approach to Volatility Evaluation

Inside Volatility Filtering, Second Edition presents a new approach to volatility estimation identifying financial econometrics based on a more accurate estimation of the hidden state. Based on the idea of "filtering," this practical guide lays out a two-step framework involving a Chapman-Kolmogorov prior distribution followed by Bayesian posterior distribution to develop a robust estimation based on all available information. This new edition gives you an edge by showing you how to:

• Base volatility estimations on more accurate data
• Integrate past observation with Bayesian probability
• Exploit posterior distribution of the hidden state for optimal estimation
• Boost trade profitability by identifying "skewness" opportunities