EWMA

Estimate expected risk, correlation matrix, or covariance matrix for assets using the exponential-weighted moving average risk model (EWMA).

Description

Practitioners may want to consider the relevance of more recent events relative to observations further in the past. The exponentially-weighted moving average (EWMA) model calculates covariances by placing more emphasis on recent observations via a decay factor,$\lambda$.

For a detailed description on the decay factor and its relationship to half-life, please see https://wpahelp.windhamlabs.com/expected-risk/exponential-risk#half-life

Syntax

The following describes the function signature for use in Microsoft Excel's formula bar.

=EWMA(type, assetReturns, lambda, dataPeriodicity)

Input(s)

Argument	Description
type	Required. Enumeration string to specify calculation type: "risk", "sigma", or "stdev" "correlation", "corr", or "rho", "covariance", "covar", or "cov"
assetReturns	Required. Time series or matrix of asset returns.
lambda	Required. Decay factor, scalar.
dataPeriodicity	Optional. Periodicity of the data, used for annualization. If you do not enter the argument, it defaults to 1. e.g. Daily = 255, Monthly = 12, Yearly = 1, Quarterly = 4.

Output(s)

Depending on the specified output type, the function will return the respective vector of risk estimates (annualized standard deviations), correlation matrix, or a covariance matrix.

Example

71KB

EWMA.xlsx

Example Workbook: EWMA