YouTube T2-22: Volatility: Exponentially weighted moving average, EWMA

Nicole Seaman

Director of FRM Operations
Staff member
The exponentially weighted moving average (EWMA) cures the key weakness of the common historical standard deviation by assigning greater weight to more recent returns and lessor weights to more distant (in the past) returns. Its key parameter is lambda, λ, which specifies the ratio of consecutive weights. The EWMA elegantly simplifies to its recursive form: σ^2(n) = λ*σ^2(n-1) + (1-λ)*u^2(n-1).

David's XLS is here: