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Measuring Volatility from historical data

adityamehta

Rutgers MQF Alum
Joined
4/27/10
Messages
2
Points
11
Why can't we measure volatility by taking (High - Low) price approach during the day, as compared to taking usual (Close - Open) price approach?

When can we use either approach?
 
Stock Volatility

Long term, the difference will not be significant. Short term, there could be a very sizable difference between the two. There is nothing wrong in choosing daily high-low's instead of the traditional approach. You can also choose to go with lows only (one day to the next) or take the highs instead. Lows are intuitively betetr than highs as you are looking at the risk.

In general, why would you not want to use the Close - Open approach? These prices are the most readily available over the long term, which by itself is a good enough reason to follow the traditional approach. Here too you can decide to use only Close and compare them from one day to the next.

There is an interesting book, Stock Market Volatility (edited by Gregoriou), that talks about some of these issues and a lot more. It might not be the most relevant, but I like some of the chapters of the book and have recently re-read them. Wiley has just come out with Exotic Options and Hybrids: A Guide to Structuring, Pricing and Trading (The Wiley Finance Series) that I received free. While the topic seem to be totally diffrent, if you read the book, you will get answers to all the questions you have now and a lot more. It's by Bouzoubaa and Osseiran. I am reading the book right now, which is probably why I am mentioning it. I see I got off topic.
http://www.amazon.com/Exotic-Options-Hybrids-Structuring-Pricing/dp/0470688033/
 
In the reality the close-to-close formula is generally used because the closing price is considered to be the most important one but this is not true anymore because volatility increased and in many cases the closing prices is just an opposite consequence of the real trend.

Let's say we have an up day, the market continues to rally for the entire day but many day traders will sell their position in order to close them before the end of the trading day and this will push down the market and the stronger the movement the higher will be the impact of day trades closing will be.

There are many models to estimate volatility and I generally use different combinations with highs,lows as well as opening and closing prices.

have a look at my website www.hypervolatility.com if you want to know something more
 
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