Volatility Check in Returns charts
Hi All! In our previous tutorial, we had introduced stylized facts, what the five stylized facts are and had also covered stylized fact 1 – Distribution of returns – Is it non-Gaussian? In this tutorial, we will be covering stylized fact 2 – “Are Volatility clusters formed in returns chart?” and do Volatility Check in Returns charts using Python. New to this series? – Go to part 1 of Financial Analytics series to develop a good understanding on this.
Stylized Fact 2: Volatility Check in Returns charts
Let’s choose MSFT stock for our analysis. We’ll use yfinance to fetch stock data of MSFT.
# Importing the libraries
import pandas as pd
import yfinance as yf
import numpy as np
import matplotlib.pyplot as plt
# Downloading MSFT data from yfinance from 1st January 2010 to 31st March 2020
msftStockData = yf.download( 'MSFT',
start = '2010-01-01',
end = '2020-03-31',
progress = False)
# Checking what's in there the dataframe by loading first 5 rows
msftStockData.head()
# Checking what's in there the dataframe by loading last 5 rows
msftStockData.tail()
# Calculating log returns and obtaining column to contain it
msftStockData['Log Returns'] = np.log(msftStockData['Adj Close']/msftStockData['Adj Close'].shift(1))
# Checking what's in there the dataframe by loading first 5 rows
msftStockData.head()
# Using back fill method to replace NaN values
msftStockData['Log Returns'] = msftStockData['Log Returns'].fillna(method = 'bfill')
msftStockData.head()
# Line chart of log return series
msftStockData['Log Returns'].plot(title = 'Daily log returns of MSFT', figsize = (14,10))
Thus, we can see that volatility clusters are formed in the line chart – there are some periods having higher returns and some periods have lower returns and they alternate forming a cycle of high-low-high. Thus, volatility doesn’t remain the same always.
So guys, we have just now explored Stylized fact 2 in this tutorial. In the next tutorial, we will explore stylized fact 3. Stay tuned! And don’t forget to subscribe to our YouTube channel.