✔️ Information reviewed and updated in December 2023 by Eduardo López
Defined as volatility, this phenomenon describes how the prices of an asset can be in heaven, and from one moment to the next, in hell. This is because markets with historical volatility tend to be very explosive and have abrupt changes in the face of the slightest internal or external stimulus.
Analyzing the volatility of an asset is essential when investing because in this way we know if it is really convenient to do so or not. That is why here we will talk about historical volatility and how you can obtain it in order to make better financial decisions.
✨What is Historical Volatility? ✨
As the name implies, Historical volatility is an indicator that is responsible for analyzing accumulated volatility over a generally long period of time. And, unlike conventional volatility, here they are not limited to one or two days of analysis.
Under this premise, we can define Historical Volatility as an indicator that analyzes the volatility of an asset over a certain period of time. There are those who come to determine it as a kind of average or average of volatility, although in reality, it is deeper.
✨Utility of Historical Volatility✨
The main use of Historical Volatility is found in the in-depth analysis of volatility. That's right, here we go deeper into a longer period of time, which allows us to have a better breadth of data and a more complete analysis.
We can see how volatility changes over time which helps us to better understand the behavior of the asset. Some experts consider that it can be more useful than daily volatility, since it allows to more accurately predict the behavior of an asset.
✨How is Historical Volatility calculated? ✨
The calculation of Historical Volatility is deeper than you might think. First, you must choose a period of time, then you must calculate the volatility variations on a daily basis in that period. Now, with that data you must determine the natural logarithm, as well as the variance in the data set.
Once you obtain these data, you must carry out an extrapolation to them which will allow you to obtain the Historical Volatility as a percentage. As you see, in reality it is a somewhat long and complex process due to the threads that you must carry out.
✨Reasons to use it✨
Although its calculation is more complex and deep than daily volatility, it is that very depth that makes Historical Volatility valuable. This is because it offers us a greater amplitude of the change in prices.
For experts, this amplitude in price changes not only allows to determine with greater precision the degree of volatility, it is also useful for making predictions. If you have ever heard: Based on historical data we can say that, since this is practically the same, history helps to predict the future of the asset and its price.