Volatility: Difference between revisions
imported>Administrator (CSV import) |
imported>Doug Williamson m (Clarified that volatility is commonly - but not always - quoted an annualised figure in the context of options valuation.) |
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The degree of variability of any financial or other variable over time. | The degree of variability of any financial or other variable over time. | ||
For example an asset price, a foreign exchange rate, or a periodic rate of return. | For example an asset price, a foreign exchange rate, or a periodic rate of return. | ||
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2. | 2. | ||
In relation to bond price sensitivity (to changes in market yields) volatility means the same as modified duration. | In relation to bond price sensitivity (to changes in market yields) volatility means the same as modified duration. | ||
3. | 3. | ||
In relation to options, volatility refers to the expected variability of the returns from investing in the underlying asset at its prevailing market price, over the remaining maturity of the option. | In relation to options, volatility refers to the expected variability of the returns from investing in the underlying asset at its prevailing market price, over the remaining maturity of the option. | ||
This is sometimes known as the ''underlying volatility'' or the ''underlying asset volatility''. | This is sometimes known as the ''underlying volatility'' or the ''underlying asset volatility''. | ||
By convention, volatility in the context of market prices is | In this context volatility is most commonly - though not always - quoted on an annualised basis. | ||
By convention, volatility in the context of market prices is most often quantified as the annualised standard deviation of the natural logs of [1 + periodic return] for the number of periods for which the return is considered. | |||
In relation to options, volatility of the underlying asset price can be estimated from: | In relation to options, volatility of the underlying asset price can be estimated from: | ||
(i) Historical underlying asset price data, or | (i) Historical underlying asset price data, or | ||
(ii) As implied volatility in the current market price of the option, if all of the other drivers of the current market price of the option (including the risk-free rate of return) are known. | (ii) As implied volatility in the current market price of the option, if all of the other drivers of the current market price of the option (including the risk-free rate of return) are known. | ||
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* [[Volatility index]] | * [[Volatility index]] | ||
* [[Volatility smile]] | * [[Volatility smile]] | ||
Revision as of 11:19, 28 November 2012
1.
The degree of variability of any financial or other variable over time. For example an asset price, a foreign exchange rate, or a periodic rate of return. It can be quantified on a simplified basis as the annualised standard deviation of the variable.
2.
In relation to bond price sensitivity (to changes in market yields) volatility means the same as modified duration.
3.
In relation to options, volatility refers to the expected variability of the returns from investing in the underlying asset at its prevailing market price, over the remaining maturity of the option.
This is sometimes known as the underlying volatility or the underlying asset volatility.
In this context volatility is most commonly - though not always - quoted on an annualised basis.
By convention, volatility in the context of market prices is most often quantified as the annualised standard deviation of the natural logs of [1 + periodic return] for the number of periods for which the return is considered.
In relation to options, volatility of the underlying asset price can be estimated from:
(i) Historical underlying asset price data, or
(ii) As implied volatility in the current market price of the option, if all of the other drivers of the current market price of the option (including the risk-free rate of return) are known.
