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Volatility conspiracy

The concept of volatility is universally used by quantitative analysts. But is it a concrete idea or a false friend? And does it even exist? Energy quant Neil Palmer takes a look at its mysteries

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Trainee accountants are taught that ‘cash is real but profit is an accounting concept’. Similarly, we should tell ourselves ‘prices are real but volatility is a quantitative concept’.

When a quant speaks of volatility, there are two things he or she may have in mind. It could be something to do with changes in a traded market price. Or it could be something rather esoteric to do with option prices. The words ‘local’ or ‘instantaneous’ refer to the first meaning, whereas

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