A multi-horizon scale for volatility

We decompose volatility of a stock market index both in time and scale using wavelet filters and design a probabilistic indicator for valatilities, analogous to the Richter scale in geophysics. The peak-over-threshold method is used to fit the generalized Pareto probability distribution for the extreme values in the realized variances of wavelet coefficients. The indicator is computed for the daily Dow Jones Industrial Averages index data from 1986 to 2007 and for the intraday CAC 40 data from 1995 to 2006. The results are used for comparison and structural multi-resolution analysis of extreme events on the stock market and for the detection of financial crises.

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