Mathematically volatility is defined as the standard deviation σ of the underlying instrument's logarithmic returns in a year and conceptually it describes the uncertainty and risk of the returns of holding the assets or instruments.
The big question about volatility is that it can only be calculated accurately when things are all settled. As to the future, there is no certain answer.
This brings lots of new methodologies to forecast and arbitrage based on different predictions of volatility. One famous and popular method in doing so is GARCH(1,1).
Many times, I am always wondering how well the GARCH model could predict the future when all we know is the past and some assumptions into the future. Is this a well-defined science or just some falsified insurance to dig ourselves into a bigger hole when the predictions fail?
Poor little one
14 years ago
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