'Filtering Noise from Volatility': Paper 5 in a Series 'Uncovering Hidden Dependencies'

Abstract

Alexander Izmailov, Ph.D (theoretical physics) and Brian Shay, Ph.D (mathematics), of Market Memory Trading, L.L.C., present in a series of nine (9) white papers, aspects of a revolutionary advance in uncovering hidden dependencies via filtering noise from correlation matrices developed by the New York based company, Market Memory Trading, L.L.C. (MMT). Correlations are quantitative measures of these dependencies and noise filtering increases their accuracy as a decision-making tool, from asset allocation to LIBOR Surveillance and cyber security.

“FILTERING NOISE FROM VOLATILITY.” White Paper 5, dated March 26, 2013, provides a demonstration of the omnipresence of noise in volatilities of returns of financial instruments; and a demonstration that more than 30% of SP500 securities can have percentage change in volatility of more than 10% as a result of noise filtering. Refer to Appendix A for Complete Series.

Keywords: volatility, noise filtering, option trading

JEL Classification: C1, C4, C6, G1, G11, F47, F10, F17, C61, C67