Realized volatility and absolute return volatility: a comparison indicating market risk
Date
2014-07-23
Authors
Zheng, Zeyu
Qiao, Zhi
Takaishi, Tetsuya
Stanley, Harry Eugene
Li, Baowen
Version
Published version
OA Version
Citation
Zeyu Zheng, Zhi Qiao, Tetsuya Takaishi, H Eugene Stanley, Baowen Li. 2014. "Realized Volatility and Absolute Return Volatility: A Comparison Indicating Market Risk." PLOS ONE, Volume 9, Issue 7, 10 pp. https://doi.org/10.1371/journal.pone.0102940
Abstract
Measuring volatility in financial markets is a primary challenge in the theory and practice of risk management and is essential when developing investment strategies. Although the vast literature on the topic describes many different models, two nonparametric measurements have emerged and received wide use over the past decade: realized volatility and absolute return volatility. The former is strongly favored in the financial sector and the latter by econophysicists. We examine the memory and clustering features of these two methods and find that both enable strong predictions. We compare the two in detail and find that although realized volatility has a better short-term effect that allows predictions of near-future market behavior, absolute return volatility is easier to calculate and, as a risk indicator, has approximately the same sensitivity as realized volatility. Our detailed empirical analysis yields valuable guidelines for both researchers and market participants because it provides a significantly clearer comparison of the strengths and weaknesses of the two methods.
Description
License
Attribution 4.0 International