Historical Volatility
IntermediateHistorical volatility is a measure of how much an asset's price has actually fluctuated over a past period, usually calculated as the annualized standard deviation of its returns.
Historical volatility looks backwards. It is calculated from past price data, typically daily returns over a period such as 30, 90 or 252 trading days, and is usually expressed as an annual percentage.
To annualize daily volatility, analysts commonly multiply it by the square root of the number of trading days in a year, often taken as 252. For example, a share whose daily returns have a standard deviation of 1% has an annualized historical volatility of about 16%.
Higher historical volatility means the asset's price has moved more, which indicates higher risk. Government bonds typically have low volatility, broad stock market indices moderate volatility, and individual shares, commodities and cryptocurrencies often much higher volatility.
Historical volatility is used in risk management, portfolio construction and option pricing. Traders often compare it with implied volatility. If implied volatility is much higher than historical volatility, options may look expensive relative to how much the asset has typically moved, although the market may be anticipating an event that past data does not reflect. Past volatility is not a guarantee of future volatility, which can change suddenly.
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