Historical Volatility (HV)
Definition of 'Historical Volatility (HV)'
Historical volatility is often used as a proxy for future volatility. However, it is important to note that historical volatility is not always a good predictor of future volatility. This is because future volatility can be affected by factors that were not present in the past, such as changes in market conditions or the introduction of new products or services.
Despite its limitations, historical volatility can still be a useful tool for investors. It can help investors to identify securities that have been historically volatile and to assess the potential risks associated with investing in those securities. Additionally, historical volatility can be used to calculate option prices and to develop trading strategies.
There are a number of different ways to calculate historical volatility. The most common method is to use the standard deviation of daily returns. However, other methods can also be used, such as the variance, the mean absolute deviation, or the range.
The period of time used to calculate historical volatility is also important. The longer the period of time, the more data points will be included in the calculation and the more accurate the volatility estimate will be. However, using a longer period of time can also make the volatility estimate less responsive to recent changes in the security's price.
Historical volatility is a valuable tool for investors, but it is important to understand its limitations. It is not always a good predictor of future volatility, and it should be used in conjunction with other factors when making investment decisions.
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