How volatility is measured
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
Volatility expresses how much a price fluctuates, usually as the standard deviation of returns. It measures the size of moves, not their direction, and the standard version is computed entirely from past data.
Key points
- Usually the standard deviation of returns
- It sizes moves; it says nothing about direction
- Annualising makes figures comparable
- Computed from past data, not future outcomes
Definition
A statistical measure of how much a price moves over a period, most often the standard deviation of daily returns, annualised for comparability.
The basic calculation lines up daily returns and takes their standard deviation, then multiplies by the square root of the number of trading days to annualise. The same procedure applies to equities and FX, which makes cross-asset comparison possible.
A high reading means daily returns are widely dispersed. Large moves up raise volatility exactly as much as large moves down. A rising market is not automatically a low-volatility one; magnitude and direction are separate ideas.
Options markets use implied volatility, backed out of option prices. It reflects the level of future movement participants are pricing in, which is not a statement that prices will in fact move that much. Always check whether a figure is implied or historical, since the two are easily conflated.
Watch out for
- · No direction can be inferred from high or low volatility
- · Changing the estimation window changes the number substantially
- · Implied volatility is what is priced in, not a forecast that proved right