FRM Glossary · Part I · Quantitative

Exponentially Weighted Moving Average (EWMA)

A recursive volatility estimator that gives recent returns more weight via a decay factor λ — the RiskMetrics λ = 0.94 default.

In more detail

σ²_t = λ σ²_{t−1} + (1 − λ) r²_{t−1}. With λ = 0.94, the half-life of an observation is about 11 trading days. EWMA is a constrained GARCH(1,1) with no constant term and is the basis of the original RiskMetrics daily volatility series.