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# StuartGordonReid/SigmaEstimatorOne.R

Created February 6, 2016 12:28
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 #' @title Estimator for the value of sigma. Sigma is the standard deviation of #' the random component of returns in the Geometric Brownian Motion model. This #' estimate can be calculated in a biased or unbiased manner. #' #' @description Given a log price process and a parameter, q, which specifies #' the sampling intervel this function estimates the value of Sigma. Sigma #' represents the standarddeviation of the random disturbance component of daily #' returns. This estimate can be annualized and can be computed in a biased or #' unbiased manner. #' #' @details The parameter, q, specifies the sampling interval to use when #' estimating sigma. When q = 1 the function will use every day's prices, when #' q = 2 the function will use every second day's prices, and so on and so #' forth. For a sufficient number of days the estimation of sigma under #' different sampling intervales e.g. 2 and 4, should converge. #' #' @param X vector :: A log price process. #' @param q int :: The sampling interval for the estimator. #' @param annualize logical :: Annualize the parameter estimate. True or False. #' @param unbiased logical :: Use the unbiased estimate. True or False. #' @return sd.est double :: The estimated value of Sigma. #' calibrateSigma <- function(X, q = 1, annualize = TRUE, unbiased = TRUE) { # Get the estimate value for the drift component. mu.est <- calibrateMu(X, annualize = FALSE) # Ensure that the format of X is appropriate. X <- as.numeric(as.vector(X)) # Calculate the number of times q goes into the length of X. n <- floor(length(X)/q) sd.est <- 0.0 for (t in 2:n) sd.est <- sd.est + (X[t * q] - X[(t * q) - q] - (q * mu.est))^2 # Calculate the average sigma using the unbiased or biased method. if (!unbiased) sd.est <- sd.est / (q * n) else sd.est <- sd.est / (q * n - 1) if (!annualize) return(sd.est) else return(sqrt((sd.est * 252))) }
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