Understanding Volatility in Financial Markets: Realised vs Implied

Explore volatility in quantitative finance: historical realized volatility, implied volatility, GARCH forecasting models, and volatility trading.

Technical White Paper Enter QuantLab

Publication TrackOptions & Derivatives

Date of Release2026-07-12

Reading Time9 min read

StatusVerified Engineering Article

#Volatility#Implied Volatility#Realised Volatility#VIX#GARCH

Executive Brief

Key Takeaways

01.Realised Volatility measures historical return variance over a past window.
02.Implied Volatility represents market expectation of future volatility backed out of option market prices.
03.Volatility clusters over time (high volatility follows high volatility), modeled effectively via GARCH processes.

Defining Financial Volatility

Volatility is the annualized standard deviation of log returns of a financial asset. It quantifies the degree of price variation and uncertainty in the market.

In financial quantitative modeling, volatility is treated not merely as a risk metric but as a tradeable asset class.

\sigma_{\text{annual}} = \sqrt{252} \cdot \sqrt{\frac{1}{N-1} \sum_{t=1}^{N} (r_t - \bar{r})^2}

Frequently Asked Questions

Why is implied volatility usually higher than realized volatility?

Option buyers pay a volatility risk premium (VRP) to insure against market crashes, making implied volatility systematically trade above realized volatility on average.

#Volatility#Implied Volatility#Realised Volatility#VIX#GARCH

Executive Brief

Key Takeaways

01.Realised Volatility measures historical return variance over a past window.
02.Implied Volatility represents market expectation of future volatility backed out of option market prices.
03.Volatility clusters over time (high volatility follows high volatility), modeled effectively via GARCH processes.

Defining Financial Volatility

Volatility is the annualized standard deviation of log returns of a financial asset. It quantifies the degree of price variation and uncertainty in the market.

In financial quantitative modeling, volatility is treated not merely as a risk metric but as a tradeable asset class.

\sigma_{\text{annual}} = \sqrt{252} \cdot \sqrt{\frac{1}{N-1} \sum_{t=1}^{N} (r_t - \bar{r})^2}

Frequently Asked Questions

Why is implied volatility usually higher than realized volatility?

Option buyers pay a volatility risk premium (VRP) to insure against market crashes, making implied volatility systematically trade above realized volatility on average.