Is there any such thing as the volatility of volatility?
Question:
I was thinking today about the Markowitz model and how it takes into account the standard deviation (volatility if I'm right).
For example if we have a 3 asset portfolio and take into account last year's standard deviation, we somehow assume that it would be almost the same next year.
Wouldn't it be good to look at the evolution of standard deviation over the past few years and see whether it is itself volatile? I have calculated it for some stocks and for some the year to year change in standard deviation is neglijable but for many it is quite a bit.
What do you think about this? Is there any way to use this volatility of volatility? Or would it suffice to just compute std dev for past 5 years...?
Thanks,
M
Answer:
I think you're on to something. What you're asking is if the rate of volatility means anything. Basically, you're looking at the slope of the volatility between two points.
In Newtonian mechanics- F=ma or F=m dV/dt. The slope of velocity is acceleration.
In the market, what is the rate of change of volatility or the acceleration of volatility?
I don't know. Where is Markowitz when you need him?
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Yes.take the vix volatility index and look at the std dev. there and this is similar to what you are getting at.
Investment management does look at this metric for different purposes.
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