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Close-to-close volatility

The simplest volatility estimator: the standard deviation of closing-price returns. Robust, widely understood, and wasteful of information.

It uses one number per day and ignores the range the market travelled between closes. A day that opened flat, ran 3% up, and closed unchanged registers as zero movement, which is obviously wrong as a description of the risk taken.

Its virtues are that it needs only a close series, it handles gaps correctly by construction, and everyone computes it the same way, so comparisons are meaningful. It is the default for good reason.

Its cost is efficiency: to reach a given precision it needs several times more data than range-based estimators like parkinson-volatility. On a 20-day window the noise in the estimate is substantial, which is one reason volatility signals look unstable.

Related: realised-volatility, parkinson-volatility, garman-klass-volatility, yang-zhang-volatility

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

A range beside a trendOne chart swinging between a flat floor and ceiling, another stepping upwards inside a pair of sloping lines.Range-boundresistancesupportprice bounces between two levelsTrendingthe trend channelhigher highs and higher lowsA range has two flat edges; a trend has two sloping ones.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.

Educational only, not advice. Spotted an error? Post in Site Feedback.