Parkinson volatility

The regular volatility calculation realized on close to close prices. This kind of calculation does not incorporate at all the information that happened during the day. The Parkinson volatility extends the regular volatility calculation by incorporating the low and high price of a security during the day.

Parkinson volatility formula

The Parkinson volatility is calculated in the following way. First, determine the days high and low prices and divide them. Takes the natural log following by taking the power of 2. Sum these results over your observed series. Due to the log taking we can just sum over observations. This intermediate result should be multiplied by a certain factor. After this, the square root gives you the Parkinson volatility.

 = \sigma_{parkingson} = \dfrac{1}{4 \cdot \ln(2)}\cdot \dfrac{252}{n}\cdot \sum_{t=1}^{n}\ln(\dfrac{H_t}{L_t})^2

Parkinson volatility relevance

The main advantage of this metric is that it also takes into account some intraday information. This is beneficial since close to close prices can lie close to one another. While huge price increases and drops could have happened during the day. This measure is therefore of high relevance for investors that are leverages. Therefore, they have to comply with intraday margin requirements in order to maintain their positions.

Summary

The Parkinson volatility estimate is an interesting alternative to calculate the mobility of a security. It offers the advantage of also incorporating the intraday high and low price to calculate a volatility metric. As such it gives some more information about how volatile a security by incorporating some intraday information.

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Parkinson volatility

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