Effective volatility ahead of a scheduled event

First-order decomposition of pre-event implied volatility into the no-learning component and the learning component: \(\sigma_{\mathrm{eff}} = \sqrt{\sigma^2 + (\Delta\eta\, q(1-q))^2 A / T}\).

Usage

ec_sigma_eff(sigma, deta, q, A, tenor)

Arguments

sigma

Numeric, annualized no-learning volatility (decimal, e.g. 0.19 for 19%).

deta

Numeric, the event exposure \(\Delta\eta = \eta_1 - \eta_2\).

q

Numeric vector of current event probabilities in \((0,1)\).

A

Numeric vector of event-clock time (non-negative).

tenor

Numeric, option tenor \(T - t\) in years.

Value

Numeric vector, annualized effective volatility (decimal).

Examples

ec_sigma_eff(sigma = 0.19326, deta = -0.099, q = 0.172, A = 0.046,
             tenor = 14 / 365)
#> [1] 0.1938758