Realised volatility

Realised volatility is the actual historical volatilityof the price of a security (or an index level, or other measure). It is an ex-post number, whereas implied volatility measures current market expectations.

Realised volatility is simply the actual volatility of a security over a period of time, measured at intervals. For example, it may be the volatility of closing prices over the last 30 days. Not only does this mean that it is measured over a specific period, but also means the interval chosen. It is usual to use daily prices.

This is very different from implied volatility which is the volatility the market expect at a point in time (usually at the time it is calculated).

The need to choose time periods is a weakness of realised volatility as is its historical nature. It does have two advantages over implied volatility:

  1. It is based on the actual volatility, rather than market expectations. Whether this is a good or bad thing depends on whether or not you think the market in question is efficient.
  2. It is not dependent on a particular model of the relationship between volatility and price. Implied volatility is usually calculated using Black-Scholes, although other models can be used.

Estimates of future volatility based on realised volatility do not necessarily depend on a single value over a single historical period. Trends in volatility can be modelled, typically giving greater weight to more recent numbers.

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