com.opengamma.analytics.financial.equity.variance.pricing.RealizedVariance.java Source code

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Here is the source code for com.opengamma.analytics.financial.equity.variance.pricing.RealizedVariance.java

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/**
 * Copyright (C) 2011 - present by OpenGamma Inc. and the OpenGamma group of companies
 * 
 * Please see distribution for license.
 */
package com.opengamma.analytics.financial.equity.variance.pricing;

import java.util.Arrays;

import org.apache.commons.lang.Validate;

import com.opengamma.analytics.financial.equity.variance.derivative.VarianceSwap;
import com.opengamma.analytics.math.FunctionUtils;
import com.opengamma.analytics.math.function.Function1D;

/**
 *  Model-independent Realized Variance result of the swap based upon observations already made.<p>
 *  Notes on market-standard form :<p>
 *  Computed as the average daily variance of log returns,then scaled by an annualizationFactor, an estimate of the number of business days per year<p>
 *  In this calculation, the average is taken over the actual number of observations provided. 
 *  In Variance instruments, the number of actual observations may be less than number expected,
 *  due to unforeseen market disruptions. To account for this, the sum is normalized by nObsExpected (>= nObsActual) 
 *  This is adjusted for in the model's presentValue method , not here. See VarSwapStaticReplication.presentValue
 */
public class RealizedVariance extends Function1D<VarianceSwap, Double> {
    @Override
    public Double evaluate(final VarianceSwap swap) {

        double[] obs = swap.getObservations();
        int nObs = obs.length;

        if (nObs < 2) {
            return 0.0;
        }

        Double[] weights = new Double[obs.length - 1];
        if (swap.getObservationWeights().length == 0) {
            Arrays.fill(weights, 1.0);
        } else if (swap.getObservationWeights().length == 1) {
            Arrays.fill(weights, swap.getObservationWeights()[0]);
        } else {
            int nWeights = swap.getObservationWeights().length;
            Validate.isTrue(nWeights == nObs - 1,
                    "If provided, observationWeights must be of length one less than observations, as they weight returns log(obs[i]/obs[i-1])."
                            + " Found " + nWeights + " weights and " + nObs + " observations.");
        }
        Validate.isTrue(obs[0] != 0.0,
                "In VarianceSwap, the first observation is zero so the estimate of RealizedVariance is undefined. Check time series.");
        double logReturns = 0;
        for (int i = 1; i < nObs; i++) {
            Validate.isTrue(obs[i] != 0.0, "Encountered an invalid observation of zero in VarianceSwap at " + i
                    + "'th observation. " + "The estimate of RealizedVariance is undefined. Check time series.");

            logReturns += weights[i - 1] * FunctionUtils.square(Math.log(obs[i] / obs[i - 1]));
        }

        return logReturns / (nObs - 1) * swap.getAnnualizationFactor();
    }

}