stock we are analyzing) to observe the variational behavior of volatility over t

ime,
usually over three to ten trading sessions.
We also use EOD time series methods to track the volatility of a stock to assess
if
it is increasing or decreasing or indeed if the volatility varies substantially
over time,
a kind of volatility of the volatility . . .
With tick data commonly available, the term realized volatility is now in common
use to refer to estimates using intraday squared returns at short sampling interva
ls
of say five minutes. In our methods we use shorter intervals, mostly expressed i
n tick
values, equivalent more or less to 60 seconds or less.
An important feature is that the variations appear often bunched together. These
short periods of increased amplitude are usually referred to as volatility cluste
ring.
Figure 22.1 uses 10T interval returns to illustrate the clustering behavior of t
he series.
The darker areas are the clusters.
As previously mentioned an unexplained property is that a high volatility cluste
ring
day is often followed by another high clustering day, whereas a quiet period is
usually
followed by another relatively tranquil period.
Volatility is often calculated and expressed as the standard deviation of return
s.
=
1/(P 1)
(r P ) 2
where
P tand for number of period ,
r i the period return and
i the average return over the lookback period.
Thu : um the difference of each return from the mean, then quare it, then divi
de
it by the number of return le one and take the quare root.
In addition to actual tandard deviation of price , which i al o often u ed, an
d the
return volatility de cribed above we al o u e a high low range
ba ed ( ometime
called the extreme value method) where we have a number of preferred very hortVol
atility
99
lookback (often in the range of 200 to 500 tick ) in contra t to normal u age w
hich
i u ually daily.
Of all the variou volatility e timator we u ually prefer the %Range metric int
raday
averaged over 200T becau e it allow u to compare metric between variou
tock
.
We often generate a time erie from the e to e timate the change in volatility
of the
tock over time. Thi i u ually calculated over anything from one e ion intra
day
with lookback of ay 100T all the way up to 20 trading e ion .
Plea e have a look at the CD file VOLATILITY for example and compari on .23
Return Theory
Here i a mall ample of what we have di covered o far when looking at return
with variou window .
When we examine the behavior of the ab olute ize of return they are a function

of the frequency at which we mea ure them. The lookback length (it
from boxcar to EOD) o

limit range