RealVol Daily vs. Real-Time Indices

Daily Versus Real-Time

No index, that VolX is aware of, currently has both daily and real-time versions simultaneously. Most indices are updated on a real-time, or nearly real-time, basis. Some are calculated daily. But, none have both. Why the distinction in this case? Typically, volatility is measured on a daily basis only. Therefore, VolX created the RealVol Daily Indices to correspond to the standard of using only daily (i.e., closing) underlying reference prices (“URPs”). The RVOL Index price on any particular day is the value that will be used to settle tradable RealVol Instruments.

However, traders often demand indices that are updated more frequently. The problem is how to furnish a real-time version for a daily volatility index. VolX solved this conundrum by taking today’s URP before the close (numbered day #22) and weighting it by the proportion of time through today’s trading day, then using the remaining weight for the first URP (day #1). In essence, the first day of the period (22 trading days prior, day #1) and the last day of the period (today, day #22) will have a combined weight of 100% in total, while the days in between will have a weight of 100% each. In this way, the 22 returns will be weighted as if there are only 21 returns and the RealVol Index will, therefore, be updating throughout the day as today’s URP changes. Note: the RealVol Real-Time Formula results in exactly the same value as the RealVol Daily Formula at the instant when the market closes.

RealVol Real-time Index

“VOL” is the symbol of the only real-time index disseminated by VolX. It is based on our flagship product only, the 21-trading- day (1-month) realized volatility as calculated using the RealVol Real-Time Formula. Essentially, it is the real-time version of the RealVol Daily Index. None of the other indices will have a corresponding real-time version.

More specifically, VOL uses the current time-weighted intraday underlying price to provide a real-time, 21-day, realized volatility. For instance, if the current time is 20 hours through the 24-hour trading day, then weight the partial day’s return by 20/24 and weight the full day’s return from 22 days prior by 4/24. All other days are full-weight, full-day (close-to-close) returns. In this manner, the index encompasses the weight of exactly 21 trading days at any point throughout the trading day.

RealVol Daily Indices

There are nine RealVol Daily Indices: three types in each of three time frames.

Three Types

Realized volatility (RVOL)
Realized volatility of volatility (RVOV)
Modified GARCH forecasts of realized volatility (FVOL)

Three Time Frames

21-days or approximately 1 month (1RVOL, 1RVOV, and 1FVOL)
63-days or approximately 3 months (3RVOL, 3RVOV, and 3FVOL)
252-days or approximately 12 months (12RVOL, 12RVOV, 12FVOL)

RVOL Indices use the RealVol Daily Formula to provide a historical perspective of realized volatility. In addition, RVOL will be used to settle tradable RealVol Instruments at expiration.

RVOV Indices use the RealVol Daily Formula a second time to provide a historical perspective of vol of vol (realized volatility of realized volatility, or realized volatility of RVOL). This is important because when trading instruments on volatility itself, we need to know how volatile they are. Additionally, we need this value for margin purposes and for risk-control purposes. Specifically, the RealVol Daily Formula is used to calculate the 21-trading-day vol of 21-trading-day vol (1RVOV), 21-trading-day vol of 63-trading-day vol (3RVOV), and 21-trading-day vol of 252-trading-day vol (12RVOV).

FVOL Indices use a modified GARCH model to forecast realized volatility. They are provided courtesy of The Volatility Institute, overseen by the Nobel laureate professor Robert Engle.