Realized variance

Realized variance or realised variance (RV, see spelling differences) is the sum of squared returns. For instance the RV can be the sum of squared daily returns for a particular month, which would yield a measure of price variation over this month. More commonly, the realized variance is computed as the sum of squared intraday returns for a particular day. Realized variance or realised variance (RV, see spelling differences) is the sum of squared returns. For instance the RV can be the sum of squared daily returns for a particular month, which would yield a measure of price variation over this month. More commonly, the realized variance is computed as the sum of squared intraday returns for a particular day. The realized variance is useful because it provides a relatively accurate measure of volatilitywhich is useful for many purposes, including volatility forecasting and forecast evaluation. Unlike the variance the realized variance is a random quantity. The realized volatility is the square root of the realized variance, or the square root of the RV multiplied by a suitable constant to bring the measure of volatility to an annualized scale.For instance, if the RV is computed as the sum of squared daily returns for some month, then an annualized realized volatility is given by 12 × R V {displaystyle {sqrt {12 imes RV}}} . Under ideal circumstances the RV consistently estimates the quadratic variation of the price process that the returns are computed from.Ole E. Barndorff-Nielsen and Neil Shephard (2002), Journal of the Royal Statistical Society, Series B, 63, 2002, 253–280. For instance suppose that the price process P t = exp ⁡ ( p t ) {displaystyle P_{t}=exp {(p_{t})}} is given by the stochastic integral where B s {displaystyle B_{s}} is a standard Brownian motion, and σ s {displaystyle sigma _{s}} is some (possibly random) process for which the integrated variance,