I want to calculate realized/historical volatility for the underlying products of various options using the Garman-Klass estimator, but I can't see to find an equation, although I know it involves OHLC data. In the comments there is a link to the equation, but I still am looking for a little explanation. Why does this work? What is the variable "F"?

  • $\begingroup$ Google is your best friend, todaysgroep.nl/media/236846/measuring_historic_volatility.pdf $\endgroup$
    – Matt
    May 15 '14 at 15:39
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    $\begingroup$ I found this, but was hoping for a better explanation. For example, what is the variable "F"? Frequency? Is this suppose to be the sqrt(252) to annualize the volatility? $\endgroup$
    – Stu
    May 15 '14 at 15:40
  • 3
    $\begingroup$ My Google-fu didn't turn up anything great so I will produce something below. Credits to @joshuaulrich for the TTR R-package I used as source. $\endgroup$
    – Bob Jansen
    May 15 '14 at 16:20

In the R TTR package the Garman-Klass volatility is given by

# Historical Open-High-Low-Close Volatility: Garman Klass
# https://web.archive.org/web/20100326172550/http://www.sitmo.com/eq/402
if( calc=="garman.klass" ) {
  s <- sqrt( N/n * runSum( .5 * log(OHLC[,2]/OHLC[,3])^2 -
             (2*log(2)-1) * log(OHLC[,4]/OHLC[,1])^2 , n ) )

which corresponds to*

$$ \sigma = \sqrt{ \frac{Z}{n} \sum \left[ \textstyle\frac{1}{2}\displaystyle \left( \log \frac{H_i}{L_i} \right)^2 - (2\log 2-1) \left( \log \frac{C_i}{O_i} \right)^2 \right] }. $$

I think this code is fairly self-explanatory but what's what?

Z = Number of closing prices in a year, n = number of historical prices used for the volatility estimate.

* $\LaTeX$ taken from the vignette.

  • 9
    $\begingroup$ I like when my documentation helps non-users of my code. :) $\endgroup$ May 16 '14 at 19:49
  • $\begingroup$ It really is excellent, better than the papers Google gives. Thanks for that! $\endgroup$
    – Bob Jansen
    May 16 '14 at 19:57

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