Introduction :

The assessment and management of financial risks has a crucial

importance in a dynamic and complex economic environment. In order to better
understand the fluctuations of the financial markets, our group has chosen to
analyze the volatility of two major players in the financial sector, namely JP
Morgan and Goldman Sachs. This study aims to explore different methods of
calculating volatility, using financial indicators such as Standard Deviation,
GARCH model, Black-Scholes model and EWMA. The main objective of our
work is to measure the volatility of these stocks over time based on specific
periods. To do this, we will divide our analysis into three distinct periods, thus
making it possible to observe the evolution of volatility indicators in various
economic contexts. This approach will provide us with in-depth insight into
potential volatility changes, identifying key times when these stocks may exhibit
higher or lower levels of risk. The diversity of calculation methods that we will
use, ranging from the classic standard deviation to more advanced models such
as GARCH, Black-Scholes and EWMA, will allow us to evaluate the relevance
of each indicator in measuring volatility. We will seek to determine which
method offers the best representation of price fluctuations, taking into account
the complexity of contemporary financial markets. In summary, our project
revolves around the in-depth analysis of the stock volatility of JP Morgan and
Goldman Sachs, using a variety of financial indicators. Dividing our study into
three distinct periods and applying different calculation methods will allow us to
determine the most relevant method for assessing the volatility of these assets
under changing economic conditions. This will help strengthen our
understanding of the financial risks associated with these actions, providing
valuable insights for informed decision-making.
JP MORGAN
JPMorgan Chase & Co. operates as a leading global financial services firm with
assets exceeding $3.7 trillion. The company's footprint extends across more than
100 countries, serving millions of customers, including corporations,
governments, institutions, and individuals.
Core Business Segments:
Consumer & Community Banking (CCB):
Offers a wide range of banking services, including deposits, credit cards,
mortgages, and auto loans.
Engages with consumers through digital platforms and an extensive branch
network.
Corporate & Investment Bank (CIB):
Provides a comprehensive suite of services to corporations, governments, and
institutions.
Expertise in investment banking, market-making, asset management, and
treasury and securities services.
Commercial Banking:
Supports middle-market companies, large corporations, and government entities
with banking solutions tailored to their needs.
Asset & Wealth Management (AWM):
Manages and grows clients' wealth through investment management, private
banking, and retirement planning services.

Goldman Sachs
Goldman Sachs stands as a stalwart in the financial landscape, renowned for its
commitment to excellence and innovation. The firm operates across the globe,
serving a diverse range of clients, including corporations, governments, financial
institutions, and individuals.
Core Business Segments:
Investment Banking:
Offers a comprehensive suite of advisory services for mergers and acquisitions,
capital raising, and strategic transactions.
Renowned for its expertise in guiding clients through complex financial
decisions.
Global Markets:
Engages in market-making, providing liquidity and facilitating trading in various
asset classes.
Known for its proficiency in risk management and navigating dynamic financial
markets.
Asset Management:
Manages a broad range of investment products for institutional and individual
clients.
Focuses on delivering long-term value and customized solutions.
Consumer & Wealth Management:
Extends financial services directly to consumers and high-net-worth individuals.
Strives to enhance clients' financial well-being through tailored wealth
management strategies.

The financial indicators

Standard Deviation
Standard deviation is a statistic that measures the dispersion of a dataset relative
to its mean and is calculated as the square root of the variance. The standard
deviation is calculated as the square root of variance by determining each data
point's deviation relative to the mean.
It’s a statistical measurement in finance that, when applied to the annual rate of
return of an investment, sheds light on that investment's historical volatility.
The greater the standard deviation of securities, the greater the variance
between each price and the mean, which shows a larger price range.
Standard deviation is an especially useful tool in investing and trading
strategies as it helps measure market and security volatility, and predict
performance trends.
A lower standard deviation isn't necessarily preferable. It all depends on the
investments and the investor's willingness to assume risk. When dealing with
the amount of deviation in their portfolios, investors should consider their
tolerance for volatility and their overall investment objectives. More aggressive
investors may be comfortable with an investment strategy that opts for vehicles
with higher-than-average volatility, while more conservative investors may not.
Standard deviation is one of the key fundamental risk measures that analysts,
portfolio managers, and advisors use. Investment firms report the standard
deviation of their mutual funds and other products. A large dispersion shows
how much the return on the fund is deviating from the expected normal returns.
Because it is easy to understand, this statistic is regularly reported to the end
clients and investors.

Exponentially Weighted Moving Average (EWMA)

The Exponentially Weighted Moving Average (EWMA) is a quantitative or
statistical measure used to model or describe a time series. The moving average
is designed as such that older observations are given lower weights. The weights
fall exponentially as the data point gets older – hence the name exponentially
weighted.
The only decision a user of the EWMA must make is the parameter « lamda ».
The parameter decides how important the current observation is in the
calculation of the EWMA. The higher the value of lamda, the more closely the
EWMA tracks the original time series.

Black-Scholes Model
The Black-Scholes model, also known as the Black-Scholes-Merton (BSM)
model, is one of the most important concepts in modern financial theory. This
mathematical equation estimates the theoretical value of derivatives based on
other investment instruments, taking into account the impact of time and other
risk factors. Developed in 1973, it is still regarded as one of the best ways for
pricing an options contract.
GARCH Model
Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) is a
statistical model used in analyzing time-series data where the variance error is
believed to be serially autocorrelated. GARCH models assume that the variance
of the error term follows an autoregressive moving average process.

RMSE

Root mean square error or root mean square deviation is one

of the most commonly used measures for evaluating the
quality of predictions. It shows how far predictions fall from
measured true values using Euclidean distance.

To compute RMSE, calculate the residual (difference

between prediction and truth) for each data point, compute
the norm of residual for each data point, compute the mean
of residuals and take the square root of that mean. RMSE is
commonly used in supervised learning applications, as RMSE
uses and needs true measurements at each predicted data
point.

Root mean square error can be expressed as