Saturday, November 17, 2012

Excel Data Analysis 3.0 (Realized Volatility, RV)

In this part we will look at calculation of Realized Volatility, henceforth RV, according to Nassim Taleb's Dynamic Hedging. We will look at iShares Dow Jones US Real Estate (IYR).

Variables definitions
dX : change in adjusted closing value
dXsq: squared returns
RV(20D): realized volatility off last 20 days of squared returns (annualized)
*here we use the standard 252 trading days/year value for the annualization.

So we get these stats:

From this we can see that real estate values could get quite volatile, and the quartiles suggest an upside skewness in the RV.

We can check it out with the skew() command. Excel Formulas

and here're the skewness values:

We can see from the skewness that like equity indices, IYR day-2-day returns have a negative skew. Its RV does indeed show a very fat tail on the upside, 25% of the time it's anywhere from 26% - 158%.

We will get into RV forecasting and associated risk management in future posts.

0 Reflections: