Feb 07

Moving Average Volatility (Three approaches: Population, Sample, Simplified) - 9 minute tutorial

by David Harper, CFA, FRM, CIPM

Within stochastic approaches to volatility, the simplest approach is moving average (note: my definition of stochastic is intentional; some would only include series that incorporate randomness). In this 9 minute tutorial, I use recent exchange rate data (Euro to US dollar) to illustrate the three ways we might calculate historical volatility:

Population variance (volatility = SQRT[variance])
Sample variance
Simple variance: average of squared returns (by way of simplifying assumptions allowed when the period is short; e.g., one day or less)

Here is the tutorial: