Shrinkage estimator versus time series with decay. versus, between, nothing, difference, period

John10

Example of time series with decay:
JP Morgan rule for predicting vol. Vol^2 =last period vol^ plus random noise^2.

What's the difference between these two ideas?

I've searched the forum but nothing doing......

Thanks,


APP

Windjam

How about the multifactor model that follows in the CFAI? can anyone please explain the difference of formula 3a and 3b, (CFAI Vol 3, Page 31)

Unforseen

Not sure what you mean by JP Morgan rule, but the two estimators from CFAI differ in the following way (quote from memory, so may be slightly wrong).

1. Shrinkage estimators: adjust/moderate forecast using historical data with data from another model/forecast (e.g., multi-factor model).

2. Time series estimators: adjust forecast using historical data by adding more weight to near-term volatility because of volatility clustering, particular with high frequencies (daily, weekly) at some markets.


Is this what you mean?

cityboy

happyking02 Wrote:
-------------------------------------------------------
> How about the multifactor model that follows in
> the CFAI? can anyone please explain the difference
> of formula 3a and 3b, (CFAI Vol 3, Page 31)


3a is for variance (variance with itself)
and 3b for covariance (variance with another variable)

The basic model: return is driven by a couple of drivers (factors).

In a sense, the CAPM is a specific case of the multi-factor case since you have only ONE variable: the market itself.

It should be noted that CAPM requires that market is in equilibrium, while multi factor model does not.