medium · FRM Part 1 Quantitative Analysis
A risk analyst is required to store the minimum amount of data to maintain a volatility series.
Why is the EWMA model particularly efficient for this task compared to a simple 250-day rolling average?
- The EWMA only requires storing the current variance and the most recent return to compute the next period's estimate.
- The EWMA model relies on a much shorter look-back window than a rolling average, typically only around 30 trading days.
- The EWMA model does not require computing returns at all; it only needs the raw daily price levels.
- The EWMA model automatically excludes days with zero returns from the recursion, which saves on storage space over time.
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