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
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.
Keywords: finance, volatility, risk, intuition, statistics, metrics
JEL Classification: D8, D9, E2, G2, N2
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Portfolio Value-at-Risk with Heavy-Tailed Risk Factors
By Paul Glasserman, Philip Heidelberger, ...
-
The Fat-Tailedness of FX Returns
By Ronald Huisman, Kees C. G. Koedijk, ...
-
Portfolio Credit Risk with Extremal Dependence
By Achal Bassamboo, Sandeep Juneja, ...
-
The Estimation of Market Risk in Portfolios of Stocks and Stock Options
By Hermann Locarek-junge, Ralf Prinzler, ...
-
Principal Component Value at Risk
By Raymond G. M. Brummelhuis, Antonio Cordoba, ...
-
Size and Risk in Financial Markets (TamaƱo y Riesgo en los Mercados Financieros)
-
Efficient Value at Risk Estimation for Mortgage-Backed Securities
By Chulwoo Han, Frank C. Park, ...