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Heteroskedasticity


The variation in volatility that arises when the standard deviation of a rate/ price has, itself, a standard deviation. Heteroskedasticity is related to the fourth moment, kurtosis, of a normal (Gaussian) distribution. This variation in normal distribution makes a normal probability distribution display the fourth moment, even when it should not come forth. This results essentially from the large difference in the size of observations in a time series.



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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