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Historical High-Low Volatility: Parkinson

by The trader, 3558 days ago
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A common and well-known way to estimate historical volatility of a financial instrument is by calculating the standard deviation of each period in the sample. Although the standard deviation is a popular measure of the volatility of an instrument, it is not the sole one. Several different calculation methods exist to estimate the historical volatility of a financial instrument.

This function uses the Parkinson formula, named after physicist Michael Parkinson, to estimate historical volatility of an underlying. Contrary to the standard deviation formula, which uses only the security close price in its calculation, the Parkinson formula uses the high and low prices but do not use the close price. No method is better than the other and each one has its advantages and disadvantages.

Function parameters:
Lookback: the number of lookback period to use to estimate the security historical volatility.

NB: The Parkinson formula is a better measure of volatility than the standard deviation for illiquid markets.
Several historical volatility formulas can be used and combinated to get a better measure of a security volatility.
The security returns should follow a geometric random walk.


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Object ID: 188


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Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.