title: Realized volatility and absolute return volatility: a comparison indicating market risk.
abstract: Measuring volatility in financial markets is a primary challenge in the theory and practice of risk management and is essential when developing investment strategies. Although the vast literature on the topic describes many different models, two nonparametric measurements have emerged and received wide use over the past decade: realized volatility and absolute return volatility. The former is strongly favored in the financial sector and the latter by econophysicists. We examine the memory and clustering features of these two methods and find that both enable strong predictions. We compare the two in detail and find that although realized volatility has a better short-term effect that allows predictions of near-future market behavior, absolute return volatility is easier to calculate and, as a risk indicator, has approximately the same sensitivity as realized volatility. Our detailed empirical analysis yields valuable guidelines for both researchers and market participants because it provides a significantly clearer comparison of the strengths and weaknesses of the two methods.
authors: Shenyang Institute of Automation, Chinese Academy of Sciences, Shenyang, P.R. China; Department of Physics and Centre for Computational Science and Engineering, National University of Singapore, Singapore, Republic of Singapore.
authors: Zeyu
authors: Z
authors: Zheng
authors: Department of Physics and Centre for Computational Science and Engineering, National University of Singapore, Singapore, Republic of Singapore; NUS Graduate School for Integrative Sciences and Engineering, National University of Singapore, Singapore, Republic of Singapore.
authors: Zhi
authors: Z
authors: Qiao
authors: Hiroshima University of Economics, Hiroshima, Japan.
authors: Tetsuya
authors: T
authors: Takaishi
authors: Center for Polymer Studies and Department of Physics, Boston University, Boston, Massachusetts, United States of America.
authors: H Eugene
authors: HE
authors: Stanley
authors: Department of Physics and Centre for Computational Science and Engineering, National University of Singapore, Singapore, Republic of Singapore; NUS Graduate School for Integrative Sciences and Engineering, National University of Singapore, Singapore, Republic of Singapore.
authors: Baowen
authors: B
authors: Li
mesh_terms: D005376:Financial Management / Q000191:economics / Q000706:statistics & numerical data*; D006801:Humans; D007449:Investments / Q000191:economics / Q000706:statistics & numerical data*; D018803:Models, Economic; D012306:Risk; D018570:Risk Assessment