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We Don't Quite Know What We are Talking About When We Talk About VolatilityDaniel G. GoldsteinMicrosoft Research New York City; London Business School Nassim Nicholas TalebNYU-Poly March 28, 2007 Journal of Portfolio Management, Vol. 33, No. 4, 2007 Abstract: Finance professionals, who are regularly exposed to notions of volatility, seem to confuse mean absolute deviation with standard deviation, causing an underestimation of 25% with theoretical Gaussian variables. In some fat tailed markets the underestimation can be up to 90%. The mental substitution of the two measures is consequential for decision making and the perception of market variability.
Number of Pages in PDF File: 8 Keywords: finance, volatility, risk, intuition, statistics, metrics JEL Classification: D8, D9, E2, G2, N2 Accepted Paper SeriesDate posted: March 14, 2007 ; Last revised: November 16, 2012Suggested CitationContact Information
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