Financial Engineering Practitioners Seminar: Bruno Dupire
Date: September 14, 2015 from 6:00 pm to 7:30 pm EDT
Location: Davis Auditorium, CEPSR Building
Contact: For further information regarding this event, please contact IEOR Department by sending email to info@ieor.columbia.edu .
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Title: Tradable Estimates of Historical Volatility

Abstract: There are many estimates of historical volatility, based on time samples, price level samples, on high and low. I define an estimate as "tradable" if it is attainable from a static position in options a dynamic trading of the underlying. I characterize the unbiased tradable estimates, show that the difference of two of them is a costless dynamic strategy and show how the daily/weekly trade performs on various time periods.

The usual estimates based on high and low are not tradable. Surprisingly, it is not because high and low are not stopping times but because they do not depend quadratically on the final value. I introduce a new high and low based estimate that is tradable and unbiased.

I conclude by using the newly developed Functional Ito Calculus to characterize the contingent claims that can be replicated by a model free strategy of dynamically trading the stock.

Bio: Bruno Dupire is head of Quantitative Research at Bloomberg L.P., which he joined in 2004. Prior to this assignment in New York, he has headed the Derivatives Research teams at Societe Generale, Paribas Capital Markets and Nikko Financial Products where he was a Managing Director. He is best known for having pioneered the widely used Local Volatility model (simplest extension of the Black-Scholes-Merton model to fit all option prices) in 1993 and the Functional Ito Calculus (framework for path dependency) in 2009. He is a Fellow and Adjunct Professor at NYU and he is in the Risk magazine "Hall of Fame". He is the recipient of the 2006 "Cutting edge research" award of Wilmott Magazine and of the Risk Magazine "Lifetime Achievement" award for 2008.