We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Is Volatility Forecasting?

Jim B.
By
Updated: May 17, 2024
Views: 5,530
Share

Volatility forecasting refers to the practice of investors attempting to gauge the amount of price movement by a specific security over time. The securities that are the most volatile are ones that move over a wide range of prices and do so often in a short period of time. There is inherent difficulty in volatility forecasting, since securities that are volatile also tend to be erratic, thus making predictions tricky. One way to forecast volatility is through the standard deviation method, which measures the difference between a security's daily prices over a certain time period and its average price over that same period.

Investors must grasp the concept of volatility before taking on the stock market. An investor wishing to get involved with a stock over a long period of time likely doesn't want to see it rise and fall erratically for the entire time it is held. Risk levels and volatility levels tend to move in proportion to each other. For those reasons, volatility forecasting is a skill that most investors should try to cultivate.

The essence of volatility means that any security that possesses it in great degree is a difficult one to assess on a daily basis. A volatile stock might have prices that bounce up and down almost at random. Investors often try and predict the timing of those rapid movements. Volatility forecasting is especially necessary for those investors who practice day trading, which often requires buying and selling securities in a matter of hours.

One method investors use to practice volatility forecasting is the standard deviation method. This requires taking the average of a security's price over a given time period. Once that is achieved, each day's price during that same period must be measured against that average. The difference between the daily price and the average price represents the daily deviation. Averaging up these deviation totals provides an amount that can be used as a basis for comparison for the volatility of different stocks.

Another simple way that a novice investor can do a bit of volatility forecasting on his own is to chart the price movement each day for the securities he wishes to study. If the chart shows lines that go up and down in a haphazard fashion, the volatility level for the security in question is significantly high. A steadier line on the chart signifies a security that is relatively stable. Projecting those charts into the future can give a decent estimate of future price movements.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.

Editors' Picks

Discussion Comments
Jim B.
Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
Learn more
Share
https://www.wisegeek.net/what-is-volatility-forecasting.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.