In finance, the volatility is a measurement of the instability of the course of a Financial credit. It is used as parameter of quantification of the risk of output and price of a financial credit.

The concept is used rather for the short-term oscillations that for the great stock exchange fluctuations over several years, often qualified (although irregular in their frequency) of Cycle S stock-brokers.

The traders are called the “risk player” in the sense that they bet in particular on future volatility.

Volatility is a paramount indicator for the fluidity of the market. A market which stagnates is a market with very low volatility. According to the financial theory, an investor admits to acquire a Financial credit having a strong volatility (thus a big risk) that if its output is high. This is why the periods of strong volatility often result in low courses making it possible the purchaser to anticipate a higher profitability.

Method of calculating

The method of calculating of this approximation of the risk can appear debatable since it takes for assumption that the future trend will be inspired by the last evolution. This quantification uses the standard deviation indeed (see Statistiques) historical variations of Rentabilité. In other words, another simplification, it bases on the Gaussian curve more or less of the rises and last price drops of this credit, on a succession of historical periods. For example, to take extremes, it uses the standard deviation of the variations day laborers over one month, or of the monthly variations over ten years, etc

One thus bases oneself often on indirect methods. Indeed, one can show that in the model of Black and Scholes, the price of a European option depends only on the volatility of the subjacent one, and not of its average output. One thus can, by reversing the formula, to find a implicit volatility credit, which is that which corresponds to anticipations of the Marché.

By opposition, the calculations based on the statistical analysis of the course of subjacent are called method of calibration histories . The calculation of the volatility of a title nonassociated with a derivative product is done by interpolation (use of matrix S of volatility).

However, nothing ensures that this parameter must remain constant in time. If one takes into account uncertainty on the uncertainty of the output of a credit, one speaks about models with stochastic volatility .

Use

Volatility is used inter alia

• for calculations to optimize the Diversification wallets of financial credits, by the use of a coefficient of correlation (Coefficient beta) between volatility of the unit of the market and volatility of an individual credit.
• with the evaluation of the financial contracts Derived S (evaluation of option for example).

Index of volatility

• the principal index used to measure the volatility of the stock market is index VIX, based on the prices of the option S (Warrant S) on the American index of actions S&P 500.

See too

• Swap of volatility

Related articles

External bonds

• the index of Volatility VIX

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