A risk measure and an indicator of technical analysis describing the elasticity of a financial variable.
Volatility can be calculated for financial variables such as the market value of a portfolio, interest rates, stock prices, exchange rates, etc. For a stock, volatility is a measure of its tendency to fluctuate over a range of prices during a period time.
The higher the volatility, the riskier a share is considered to be.
To be relevant, the analysis of the volatility should be done in the light of the evolution of the stock price and volume compared to the market.
Volatility has several uses and potential interpretations :
1) the degree of volatility of a stock can be used to determine whether or not it should be considered for selection into trading and investment strategies
2) when a stock tends to have a certain range of volatility over an extended period of time, and then breaks upwards out of the range, it can mean that there will be a change in trend. If it breaks downwards out of the range, it can mean that the frequency and severity of short-term price swings will decrease as the overall trend establishes itself among investors.
3) recognizing cycles in volatility can be useful in determining appropriate times to anticipate a price breakout. Many stocks can have cycles with a high degree of regularity. Volatility's tendency to be autocorrelative (meaning that reversals often continue in the new direction) can help create circumstances to be a powerful leading indicator.
Finally, volatility can be used to calculate the theoretical option value.
Infinancials uses a method of estimating volatilities based on 3 months (62 business days) historical market value fluctuations.
Formula for a 3-month period:
square root of (250 x Var [Xn-T;Xn])
Xn = ln (Rn / Rn-1 )
Rn return (stockprice) at the date n
250 : factor of annualization representing the number of working days per year.
T : represents the number of working days in the period : for 3 months, T = 62.
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