Scaling risk for irregularly spaced time series?
the square root of time thing you use is valid even if you just calculated the sharp ratio over one's hours worth of data, as long as you willing to make the assumptions it's making. that thing is is taking a hourly variance estimate and then assuming that the variances are independent, adding them up over 24 hours to make a daily estimate, and then taking the square root to get the daily standard deviation. so, it doesn't matter how many hours of data you have as long as you are calculating an hourly volatility estimate based on that data. whether the independence assumption holds is a totally different story.
On Fri, Oct 10, 2008 at 4:40 PM, Shane Conway wrote:
I'm working with intraday FX price data (primarily hourly bars). I want to scale my volatility calculations up to the daily level. Ordinarily I would us the square-root-of-time rule and multiple by the sqrt(T). The question is: how do people deal with this scaling factor when the time series is irregularly spaced? If I apply sqrt(24) for hourly data but I only have 8 hours of data (for instance), my calculation will be way off. Thanks, Shane
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