We Don't Quite Know What We are Talking About When We Talk About Volatility
8 Pages Posted: 14 Mar 2007 Last revised: 14 Dec 2017
Date Written: March 28, 2007
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.
Keywords: finance, volatility, risk, intuition, statistics, metrics
JEL Classification: D8, D9, E2, G2, N2
Suggested Citation: Suggested Citation
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