Realized Volatility (RV)
Standard volatility (Standard Deviation) uses Daily Closing prices. This ignores everything that happened during the day. Realized Volatility uses intraday returns (e.g., 5-minute intervals) to get a sharper picture of risk.
The Theory
If you sum up the squared returns of high-frequency intervals, you converge to the "Integrated Variance".
Formula (Realized Variance)
RV = Sum(r_t^2)
Where rt are the returns of 5-minute intervals (or 10-minute).
Why not use 1-second returns?
If you sample too frequently (e.g., every second), you get Microstructure Noise (Bid-Ask bounce).
- The price bouncing between Bid and Ask looks like volatility, but it's just noise.
- Sweet Spot: 5-minute sampling is the industry standard—it captures the movement but filters out the bid-ask bounce.
Note
Advantage: RV is "Model Free". You don't need GARCH or complex assumptions. You just measure what actually happened.
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