Jun
22
Classic research on volatility
June 22, 2025 |
Converting 1-Day Volatility to h-Day Volatility: Scaling by sqrt(h) is Worse than You Think
Francis X. Diebold, Atsushi Inoue - University of Pennsylvania
Andrew Hickman, Til Schuermann - Oliver, Wyman and Company
We show that the common practice of converting 1-day volatility estimates to h day estimates by scaling by sqrt(h) is inappropriate and produces overestimates of the variability of long-horizon volatility. We conclude that volatility models are best tailored to tasks: if interest centers on long-horizon volatility, then a long-horizon volatility model should be used. Economic considerations, however, confound even that prescription and point to important directions for future research.
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