EWMA Volatility Estimator

This script calculates EWMA Volatility (Exponentially Weighted Moving Average Volatility).
Commonly used model in financial risk management.
It estimates recent price volatility by applying more weight to the most recent returns, capturing volatility clustering while remaining responsive to fast market shifts.

The method uses a decay factor (λ) of 0.94, the standard value used in models like RiskMetrics, and converts the variance estimate into annualized volatility in percentage terms.

This is not a forecasting tool. It’s an estimator that reflects the magnitude of recent price moves in a statistically robust way.



It can be helpful for:

1. Understanding regime shifts in market behavior
   
2. Designing position sizing rules based on recent volatility
   
3. Filtering entries during high or low volatility phases
   

How It Works

1. Computes log returns of the closing price.
   
2. Squares the returns to get a proxy for variance.
   
3. Applies an exponential moving average to the squared returns using an equivalent EMA period based on λ = 0.94.
   
4. Converts the result to volatility by taking the square root and scaling to a percentage.
   

Key Characteristics

1. Backward-looking estimator
   
2. Reacts faster than standard rolling-window volatility
   
3. Smooths noise while still being sensitive to recent spikes
   

This script is educational and informational. It is not financial advice or a guarantee of performance. Always test any tool as part of a broader strategy before using it in live markets.