Modelling Stock Prices with Exponential Weighted Moving Average (EWMA)

Abstract

Volatility is an important parameter for financial risk management and it is applied in many issues such as option pricing, portfolio optimization, VaR methodology and hedging; thus the forecasting of volatility or variance can be regarded as a problem of financial modelling. The objective of this paper is to forecast FTSE 100 Stock Prices of top 100 companies listed on London Stock Exchange by using the Exponential Weighted Moving Average (EWMA) Model. The data for this model are directly obtained from the UK FTSE 100 Index. In this research paper, we have examined the daily returns of FTSE 100 Stock Prices of top 100 companies listed on London Stock Exchange from the thirtieth day of June 2009 to the first day of December 2014 and equally forecasted the daily returns from the first day of December 2014 to the fifth day of February 2015 with the Exponential Weighted Moving Average (EWMA) Model. We found that there is a very high possibility that the stock prices will start to fall as from 5th February 2015 downwards.