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What methods can be applied to determine the volatility of strategy using a rolling window? Using normal standard deviation would bias the results as the returns will be highly correlated. Although, after reading several papers where a rolling window is applied, I've not seen one mention anything about it. Is it because it is not necessary or is it "too simple"?

By rolling window I simply mean that, for instance, the the strategy is tested over a 6 month period, then rolled forward 1 month and from there tested over a 6 month period, etc.

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what do you try to accomplish? I am not sure from your question what you are asking or where you try to get to. Is this to evaluate the risk profile of a strategy or is this in order to test for the stability of strategy parameterization? – Matt Wolf Apr 28 '13 at 3:20
Mainly at the risk profile of the strategy, by looking at the standard deviation of the returns – Good Guy Mike Apr 28 '13 at 3:29
I am still not sure I understand correctly: Why would the generated returns and their variations be impacted by different approaches to analyze such returns and their variations? Your risk/return profile is strictly a function of your model specification and changing market dynamics. I do not see any advantage in changing your strategy risk-return profile generation process. I would rather look at different risk/return windows and look at the stability of risk/return between such risk/return clusters. – Matt Wolf Apr 28 '13 at 4:40
Ok. What I thought was that when rolling forward the same profits will be included several time (at least similar profits generated by the same stock movement or whatever the underlying asset is, also dependent on how the strategy is implemented). As the returns are also similar this doesnt affect the mean. However the s.d. gets heavily reduced. Isn't this a bit misleading? The shorter the rolling window is the more similar the profits get and the more the s.d. is reduced. – Good Guy Mike Apr 28 '13 at 8:06

One could use a GARCH of his choice to estimate the volatility. A mean over your period would be a good indicator, otherwise the instant conditional sd is as good as it gets. Another way could be via an exponential smoothing of the risk-metrics type. Your question is not so clear is to be honest.

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I've analysed numerous strategies, and have never encountered problem similar to yours. Your approach of volatility measurement may be a bit deviating from the conventional thinking. Essentially, why would you measure volatility of overlapping returns? It's not sensible. No matter what rolling or walk-forward schemes you are adopting, one can always derive the daily return, and measure their standard deviation as a proxy for volatility.

If risk profile is what you are concerning with, then standard deviation is a good enough and pretty standard metric, although I admit that volatility does not equal risk. If stability of returns is your main concern, then you might want to measure the volatility, VaR and draw down, etc., in each non-overlapping periods.

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