An Instantaneous Market Volatility Estimation
16 Pages Posted: 12 Aug 2019 Last revised: 14 Aug 2019
Date Written: August 7, 2019
Working on different aspects of algorithmic trading we empirically discovered a new market invariant. It links together the volatility of the instrument with its traded volume, the average spread and the volume in the order book. The invariant has been tested on different markets and different asset classes. In all cases we did not find significant violation of the invariant. The formula for the invariant was used for the volatility estimation, which we called the instantaneous volatility. Quantitative comparison showed that it reproduces realised volatility better than one-day-ahead GARCH (1,1) prediction. Because of the short-term prediction nature, the instantaneous volatility could be used by algo developers, volatility traders and other market professionals.
Keywords: volatility, order book, realised volatility, market invariant
JEL Classification: G12, G14, G17
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