Volatility – Stylized Facts

Nov 18, 2020

There are a handful of stylized facts about asset price volatility. (A stylized fact is a term widely used in economics that refer to empirical findings that are so consistent — for example, across a wide range of instruments, markets and time periods — that they are accepted as truth). In summary, here are five stylized facts about Volatility:

  • Volatility Exhibits Persistence;
  • Volatility Varies Over Time. The truths that volatility persists and volatility varies are not inconsistent or contradictory b/c VOL is market regime dependent.
  • Volatility has a Half-Life. A “half-life” of volatility is defined as the time taken for an asset’s volatility to move halfway back towards its unconditional mean or average level.
  • Volatility is Mean-Reverting;
  • Volatility News is Self-Reinforcing. Negative news sentiment is one source of heightened volatility levels.