Historical Volatility Demystified, Part II……by Tyler Craig

• Posted by Adam Warner
• on September 11th, 2009

 

Speaking of “Blogging Tyler’s” what ever happened to that “Durden” guy?  Anyway….

Historical volatility can be measured over any time frame you desire. Commonly used time periods include 10, 30, and 90 days. If you want to view different lengths simultaneously, some software programs allow you the ability to overlay them on top of each other which aids in making comparisons. Take a look at a chart of the S&P 500 index which compares historical vol over three different time frames (click thru to view….then click to enlarge).

Here are a few important nuances with the different time periods:

1. Much like moving averages, short measurements of HV such as 10 days move quicker and are more erratic or noisy. The advantage to using a shorter term level of HV is it can provide a quicker indication as to whether or not volatility is picking up or dropping, but it gives more false signals due to its erratic nature.
2. Longer measurements of HV such as 30 or 90 days are slower moving and less erratic. As such they provide slower indications as to whether or not volatility is picking up or dropping.
3. When you get an extended expansion or compression in volatility (i.e. the stock continues to increase or decrease in volatility), shorter term levels of HV tend to lead the longer term levels of HV. This should come as no surprise as we’ve already asserted that shorter term HV moves quicker than longer term HV.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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