Andrew Clark of Thomson Reuters explains realised volatility, and looks at the applications and trends for realised volatility indices.
Date: Mar 2012
It is not implied volatility, he explained, because those people trade options and and they put an estimate of what they think volatility is going to be. Their focus isn’t necessarily on forecasting volatility, but rather on trying to price an option correctly.
Trends in how realised volatility is used
According to Clark, people are using realised volatility not so much as a substitute for the VIX, but to understand the market better.
Some people refer to the VIX as the fear index, as a measure of the sentiment – it is not a forecasting tool, he said.
In the US, Clark said realised volatility is mainly being used for indexes on a global basis. The Thomson Reuters index is used by hedge funds as well as options traders to make more money by trading various parts of options pieces. They use the realised volatility calculations to be better traders.
Risk managers are the ones using the indices, to ensure the portfolio managers stay within certain agreed risk boundaries.
In terms of applications for realised volatility indexes in the private wealth space, Clark said some of the larger banks are using them if they are running private indices, for example on commodities, as a way of managing volatility.
Such indices give them more ideas about how to manage tail risks, for instance, he explained.