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    EWMA Calculation

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    nickbuch
    This document outlines the steps to calculate an exponentially weighted moving average (EWMA). It discusses: 1) Determining the time/price series and calculating periodic returns through the natural log of today's returns over yesterday's returns. 2) Calculating the average of squared returns over a period to get the variance, or simple moving average. 3) Weighting the average squared returns exponentially by assigning a decreasing weight to trailing periods using the lambda coefficient, with the most recent period receiving a weight of 1-λ and older periods receiving 94% of the preceding period's weight.

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    EWMA Calculation

    Uploaded by

    nickbuch
    48 views1 page
    This document outlines the steps to calculate an exponentially weighted moving average (EWMA). It discusses: 1) Determining the time/price series and calculating periodic returns through the natural log of today's returns over yesterday's returns. 2) Calculating the average of squared returns over a period to get the variance, or simple moving average. 3) Weighting the average squared returns exponentially by assigning a decreasing weight to trailing periods using the lambda coefficient, with the most recent period receiving a weight of 1-λ and older periods receiving 94% of the preceding period's weight.

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    This document outlines the steps to calculate an exponentially weighted moving average (EWMA). It discusses: 1) Determining the time/price series and calculating periodic returns through the natural log of today's returns over yesterday's returns. 2) Calculating the average of squared returns over a period to get the variance, or simple moving average. 3) Weighting the average squared returns exponentially by assigning a decreasing weight to trailing periods using the lambda coefficient, with the most recent period receiving a weight of 1-λ and older periods receiving 94% of the preceding period's weight.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    48 views1 page

    EWMA Calculation

    Uploaded by

    nickbuch
    This document outlines the steps to calculate an exponentially weighted moving average (EWMA). It discusses: 1) Determining the time/price series and calculating periodic returns through the natural log of today's returns over yesterday's returns. 2) Calculating the average of squared returns over a period to get the variance, or simple moving average. 3) Weighting the average squared returns exponentially by assigning a decreasing weight to trailing periods using the lambda coefficient, with the most recent period receiving a weight of 1-λ and older periods receiving 94% of the preceding period's weight.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
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    of 1

    Nicholas)Bucheleres) October)31,)2010!

    ! Exponentially!Weighted!Moving!Average!Calculation!
    !
    )

    Step!1:)Determine)Time/Price)Series) ) Step!2:)Calculate)Periodic)Returns) ) )

    # Ri & x i = ln% ( Ri1 ' ) $


    Natural'Log'of'(todays'returns'over'yesterdays'returns).''

    ) Step!3:)Average)Squared)Returns)

    The'average'of'the'summation'of'squared'returns'over'period'm'returns'the'variance' of'price'movement,'or'the'simple'(non?weighted)'moving'average.'

    1 m 2 Variance= = x n 1 )) m i=1
    2

    Now)we)have)the)average)of)the)squared)returns,)or)variance)(simple)moving) average).))In)order)to)exponentially)weight)this)average,)we)are)going)to)assign)a) decreasingly)weighted)tail)to)our)price)series.) ) We)are)going)to)use)the)lambda)coefficient)to)apply)a)proportionally)weighted) significance)to)(nR1))trailing)time)periods.))The)most)recent)periodic)return)receives) a)weight)of)(1R) ),)which)means)that)todays)squared)return)receives)a)weight)of)) (1Rx%))of)the)series.)Industry)convention)dictates)that) =94%,)so)today)receives)a) 6%)weighting,)yesterday)receives)a)weighting)of)(6%)*() =94%),)so)5.6%,)and)so) on.))Each)period)receives)94%)of)the)weighting)that)one)more)recent)does.)))) ) This)process)can)be)reduced)into)one)streamlined)formula:) )

    ) The'weighted'squared'returns'of'period'n=today'equals'(yesterdays'variance'times' the'lambda'coefficient)'plus'(1'minus'lambda)'times'yesterdays'squared'return.''' ) Note:' )+)(1R) ))=)1) )

    n = n 1 + (1 ) x n 1 )

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