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VOLATILITY

DEFINITION
Volatility is a measure for variation of price of a financial instrument over time. The
relative rate at which the price of a security moves up and down. Volatility is found
by calculating the annualized standard deviation of daily change in price. Stock price
volatility is an indicator that is most often used by options traders to find changes in
trends in the market place.
If the price of a stock moves up and down rapidly over short time periods, it has high
volatility. If the price the price almost never changes, it has low volatility.
It is an important measure in quantifying risk; for example, a security with a volatility
of 50% is considered very high risk because it has the potential to increase or decrease
up to half its value. Volatility may influence the type of investments one makes: one
may directly invest in non-volatile securities, such as a certificate of deposit.
TYPES OF VOLATILITY
1. Historical Volatility
Historical Volatility is the realized volatility of a financial instrument over a given
time period. It is the measure of a stocks price movement based on historical prices
(stock price history)
Generally, this measure is calculated by determining the average deviation from the
average price of a financial instrument in the given time period. Standard deviation is
the most common but not the only way to calculate historical volatility. It measures
the fluctuations in the share price, and more specifically it is measured by taking the
daily percentage price changes in a stock and calculating the average over a specific
time frame.
2. Implied Volatility
The term implied volatility refers to an expectation of volatility in the underlying
asset from the present till the options expiration, using current options pricing data as
a basis. The greater the volatility that is presented by an asset, the more expensive an
option becomes due to the fact that it has a greater chance of achieving its target.

There is also a tendency for implied volatility to increase when the market is bearish
and decrease when it is bullish. The calculation of implied volatility can be derived
through the use of a theoretical option pricing model such as Black Scholes Options
pricing model.

VOLATILITY IN NEPSE (MID JULY 2009 MID JULY 2010)


The volatility of a stock price is a measure of uncertainty of the future stock price
movement. The volatility as per NEPSE index (Mid July 2009 Mid July 2010) is
show as:
Date
16-Jul-09
19-Jul-09
20-Jul-09
21-Jul-09
23-Jul-09
26-Jul-09
27-Jul-09
28-Jul-09
29-Jul-09
30-Jul-09
2-Aug-09
3-Aug-09
4-Aug-09
9-Aug-09
10-Aug-09
11-Aug-09
12-Aug-09
16-Aug-09
17-Aug-09
18-Aug-09
19-Aug-09
20-Aug-09
23-Aug-09
24-Aug-09
25-Aug-09
26-Aug-09
27-Aug-09
30-Aug-09
31-Aug-09
1-Sep-09
2-Sep-09
6-Sep-09
7-Sep-09
8-Sep-09
9-Sep-09

NEPSE
INDEX
735.87
734.34
739.02
737.97
737.84
708.11
730.64
729.05
721.49
716.01
704.71
700.16
700.01
693.64
690.32
690.22
717.20
721.95
716.01
715.35
714.40
709.82
702.22
693.34
678.87
682.31
681.54
671.15
661.03
654.63
660.40
662.57
657.53
630.11
620.39

Relative Change in
Price
(Rt)
-----0.002081336
0.006352848
-0.001421811
-0.000176174
-0.04112755
0.031321414
-0.002178546
-0.010423799
-0.007624385
-0.015907763
-0.00647749
-0.00021426
-0.009141527
-0.004797836
-0.000144871
0.038344354
0.006601143
-0.008261751
-0.0009222
-0.001328904
-0.006431613
-0.010764672
-0.012726246
-0.021090848
0.005054449
-0.001129157
-0.015362285
-0.015193434
-0.009729034
0.008775522
0.003280501
-0.007635822
-0.042595983
-0.015546095

Rt-Rm

(Rt-Rm)*(Rt-Rm)

----1.0936206
-3.3380505
0.74707858
0.09256938
21.6101266
-16.457574
1.14469854
5.47709766
4.00616908
8.3586006
3.40354301
0.11258096
4.80333862
2.52098258
0.07612117
-20.14772
-3.4685151
4.34106787
0.48456223
0.69826139
3.37943705
5.65620645
6.68689926
11.0820094
-2.6558178
0.59330585
8.07198368
7.98326276
5.11203943
-4.6110242
-1.7237116
4.01217883
22.3817024
8.16856523

----1.196006012
11.14258125
0.558126402
0.008569091
466.9975699
270.8517512
1.310334751
29.99859877
16.04939073
69.86620398
11.58410501
0.012674473
23.07206187
6.355353175
0.005794433
405.9306093
12.03059707
18.84487028
0.234800551
0.487568972
11.42059478
31.99267141
44.71462167
122.8109332
7.05336808
0.35201183
65.15692058
63.73248425
26.13294711
21.2615446
2.971181531
16.09757894
500.9406011
66.72545798

10-Sep-09
13-Sep-09
14-Sep-09
15-Sep-09
16-Sep-09
17-Sep-09
20-Sep-09
22-Sep-09
23-Sep-09
24-Sep-09
4-Oct-09
5-Oct-09
6-Oct-09
7-Oct-09
8-Oct-09
11-Oct-09
12-Oct-09
13-Oct-09
14-Oct-09
15-Oct-09
21-Oct-09
22-Oct-09
25-Oct-09
26-Oct-09
27-Oct-09
28-Oct-09
29-Oct-09
1-Nov-09
2-Nov-09
3-Nov-09
4-Nov-09
5-Nov-09
8-Nov-09
9-Nov-09
10-Nov-09
11-Nov-09
12-Nov-09
15-Nov-09
16-Nov-09
17-Nov-09
18-Nov-09
19-Nov-09

614.79
617.34
628.44
629.88
628.34
627.97
628.90
632.70
630.45
630.55
634.44
636.87
613.18
607.86
604.37
599.33
598.37
598.80
599.50
609.55
601.21
601.16
599.43
595.33
590.44
585.04
578.19
567.06
567.27
571.58
581.55
584.64
587.21
583.10
580.23
576.80
565.86
566.94
561.82
564.98
562.22
563.01

-0.009067566
0.00413918
0.017820632
0.002288767
-0.002447904
-0.000589027
0.001479867
0.006024115
-0.003562526
0.000158604
0.006150266
0.003822833
-0.037907022
-0.008713938
-0.005757999
-0.008374229
-0.001603073
0.000718361
0.001168322
0.016625006
-0.013776689
-8.31691E-05
-0.002881918
-0.00686333
-0.008247852
-0.009187801
-0.011777687
-0.019437416
0.000370263
0.007569075
0.017292497
0.00529932
0.004386234
-0.007023809
-0.004934122
-0.005928991
-0.019148888
0.00190678
-0.009071964
0.005608818
-0.0048971
0.001404158

4.76447681
-2.1748972
-9.363702
-1.2026134
1.28623055
0.3094991
-0.7775837
-3.1653205
1.87189945
-0.0833373
-3.2316055
-2.0086756
19.9179273
4.57866591
3.02549239
4.40016822
0.84232122
-0.3774567
-0.613885
-8.7354699
7.23884573
0.04370049
1.51427987
3.60627925
4.33376471
4.82765289
6.18848672
10.2132274
-0.1945514
-3.9771071
-9.0861976
-2.7844835
-2.3047099
3.69060153
2.59259283
3.11533848
10.0616228
-1.0019017
4.76678753
-2.9471066
2.57314012
-0.7378028

22.70023932
4.730177844
87.67891516
1.446279055
1.654389021
0.095789691
0.60463637
10.01925412
3.50400756
0.006945104
10.44327437
4.034777694
396.7238278
20.96418149
9.153604225
19.36148037
0.709505041
0.142473545
0.376854749
76.30843358
52.40088745
0.001909733
2.293043515
13.00525006
18.78151656
23.30623245
38.29736794
104.3100147
0.037850245
15.81738069
82.5589862
7.753348368
5.311687579
13.62053966
6.7215376
9.705333816
101.2362542
1.003807014
22.72226339
8.685437472
6.621050071
0.54435304

22-Nov-09
23-Nov-09
24-Nov-09
25-Nov-09
26-Nov-09
30-Nov-09
1-Dec-09
3-Dec-09
6-Dec-09
7-Dec-09
8-Dec-09
9-Dec-09
10-Dec-09
13-Dec-09
14-Dec-09
15-Dec-09
16-Dec-09
17-Dec-09
20-Dec-09
21-Dec-09
22-Dec-09
23-Dec-09
24-Dec-09
27-Dec-09
28-Dec-09
29-Dec-09
31-Dec-09
3-Jan-10
4-Jan-10
5-Jan-10
6-Jan-10
7-Jan-10
10-Jan-10
11-Jan-10
12-Jan-10
13-Jan-10
14-Jan-10
17-Jan-10
18-Jan-10
19-Jan-10
20-Jan-10
21-Jan-10

562.11
549.03
543.41
541.55
534.32
528.89
521.77
517.45
519.16
524.18
530.35
537.57
545.66
553.40
554.54
548.61
542.10
539.21
538.68
536.93
541.86
543.57
545.66
545.27
545.73
547.41
548.11
546.96
540.12
536.18
536.63
535.81
535.41
534.34
532.26
530.81
530.96
528.90
524.19
522.05
520.42
518.11

-0.00159983
-0.023544475
-0.010288985
-0.003428701
-0.013440488
-0.01021444
-0.013553593
-0.008313976
0.003299219
0.009623016
0.011702029
0.013521818
0.014937087
0.014084996
0.002057874
-0.010751135
-0.01193732
-0.005345381
-0.000983403
-0.00325397
0.009139933
0.003150828
0.003837578
-0.000714986
0.000843263
0.003073717
0.001277932
-0.002100323
-0.012584337
-0.007321412
0.000838918
-0.001529223
-0.000746812
-0.002000468
-0.003900249
-0.00272795
0.000282547
-0.003887311
-0.008945164
-0.004090845
-0.003127191
-0.004448603

0.84061711
12.3712473
5.40626114
1.80158231
7.06219172
5.36709174
7.12162185
4.36850884
-1.7335468
-5.0563331
-6.1487332
-7.104926
-7.8485672
-7.4008432
-1.0812926
5.64909364
6.27236492
2.80868557
0.51672078
1.70977147
-4.8025014
-1.655576
-2.0164232
0.37568357
-0.4430855
-1.6150587
-0.6714787
1.10359719
6.61233417
3.84697432
-0.4408026
0.80351761
0.39240615
1.05112918
2.049353
1.43337846
-0.148462
2.04255487
4.7001615
2.14950037
1.64315623
2.33748114

0.70663712
153.0477607
29.22765949
3.245698821
49.87455195
28.80567379
50.71749784
19.08386944
3.005184588
25.56650445
37.80691958
50.4799739
61.60000772
54.77248046
1.169193676
31.91225891
39.34256166
7.888714655
0.267000366
2.923318492
23.06401934
2.740931804
4.065962622
0.141138148
0.196324792
2.608414509
0.450883673
1.217926751
43.72296319
14.79921145
0.194306972
0.64564055
0.153982587
1.104872558
4.199847728
2.054573823
0.022040963
4.17203039
22.09151809
4.620351862
2.699962408
5.463818089

24-Jan-10
25-Jan-10
26-Jan-10
27-Jan-10
28-Jan-10
31-Jan-10
1-Feb-10
2-Feb-10
3-Feb-10
4-Feb-10
7-Feb-10
8-Feb-10
9-Feb-10
10-Feb-10
11-Feb-10
15-Feb-10
16-Feb-10
17-Feb-10
18-Feb-10
1-Mar-10
2-Mar-10
3-Mar-10
4-Mar-10
7-Mar-10
9-Mar-10
10-Mar-10
11-Mar-10
14-Mar-10
16-Mar-10
17-Mar-10
18-Mar-10
22-Mar-10
23-Mar-10
25-Mar-10
28-Mar-10
29-Mar-10
30-Mar-10
31-Mar-10
1-Apr-10
4-Apr-10
5-Apr-10
6-Apr-10

516.77
516.82
513.71
511.70
515.24
512.34
510.10
507.02
502.79
501.40
497.34
489.40
479.73
492.88
497.24
493.02
486.82
485.82
485.14
497.86
503.12
517.00
514.04
504.52
500.71
489.61
486.25
481.19
480.49
477.62
475.80
472.82
469.14
466.09
459.87
454.43
443.73
443.17
452.46
458.13
455.26
449.49

-0.002589674
9.67502E-05
-0.006035748
-0.003920388
0.006894296
-0.005644344
-0.004381682
-0.006056334
-0.008377863
-0.002768402
-0.008130289
-0.016093746
-0.019956705
0.027042291
0.00880707
-0.008523066
-0.012655296
-0.00205626
-0.001400676
0.025881404
0.010509797
0.027214164
-0.005741791
-0.018693601
-0.007580391
-0.022417935
-0.006886261
-0.010460692
-0.001455786
-0.005990979
-0.003817839
-0.006282831
-0.007813535
-0.006522483
-0.013434908
-0.011899954
-0.023827617
-0.001262826
0.020745918
0.012453625
-0.006284302
-0.012755078

1.36072234
-0.0508366
3.17143295
2.05993507
-3.6225499
2.96577346
2.30231821
3.18225015
4.40207773
1.45463372
4.27199217
8.45632389
10.4860836
-14.209145
-4.6276012
4.47837348
6.64961938
1.08044457
0.73597339
-13.599167
-5.5222849
-14.299455
3.016976
9.82239612
3.98305295
11.7793163
3.61832808
5.49648318
0.76493054
3.14790987
2.00605171
3.30126116
4.1055565
3.42718395
7.05925966
6.25273137
12.5200217
0.6635412
-10.900769
-6.543653
3.30203399
6.70204864

1.851565273
0.002584356
10.05798698
4.243332492
13.12286788
8.795812205
5.30066912
10.12671604
19.37828832
2.115959267
18.24991711
71.50941366
109.9579495
201.8998085
21.4146933
20.05582903
44.21743789
1.16736048
0.541656828
184.9373382
30.49563039
204.4744012
9.102144211
96.47946552
15.86471084
138.752292
13.09229812
30.21132736
0.585118726
9.909336532
4.024243466
10.89832524
16.85559419
11.74558985
49.83314699
39.09664962
156.7509432
0.440286928
118.8267579
42.81939461
10.90342848
44.917456

7-Apr-10
8-Apr-10
11-Apr-10
12-Apr-10
13-Apr-10
15-Apr-10
18-Apr-10
19-Apr-10
20-Apr-10
21-Apr-10
22-Apr-10
25-Apr-10
26-Apr-10
27-Apr-10
28-Apr-10
29-Apr-10
9-May-10
10-May-10
11-May-10
12-May-10
13-May-10
16-May-10
17-May-10
18-May-10
19-May-10
20-May-10
23-May-10
24-May-10
25-May-10
26-May-10
30-May-10
31-May-10
1-Jun-10
2-Jun-10
3-Jun-10
6-Jun-10
7-Jun-10
8-Jun-10
9-Jun-10
10-Jun-10
13-Jun-10
14-Jun-10

443.89
446.03
443.54
443.66
444.76
449.04
446.05
441.73
438.64
426.54
426.57
423.41
415.47
407.60
405.45
419.28
413.02
418.77
431.56
449.08
457.81
440.54
440.34
448.60
454.12
461.99
462.57
462.63
482.44
479.40
506.35
490.08
479.98
480.48
482.34
478.64
478.61
482.76
486.60
484.82
480.62
476.69

-0.012536823
0.00480943
-0.005598225
0.000270514
0.002476308
0.00957716
-0.006680917
-0.009732218
-0.007019805
-0.027972882
7.03309E-05
-0.007435503
-0.018930567
-0.019124108
-0.00528874
0.033541393
-0.015042937
0.013825825
0.030084707
0.039793656
0.019259529
-0.038466
-0.000439796
0.018574602
0.012224963
0.017180379
0.001270281
0.000121837
0.041927826
-0.006323914
0.054696513
-0.032661296
-0.020810661
0.001031236
0.003873663
-0.007715803
-5.73024E-05
0.008625983
0.007938236
-0.003681193
-0.008696259
-0.008207757

6.58736845
-2.5270749
2.94154041
-0.1421393
-1.301155
-5.0322384
3.510432
5.11371222
3.68849751
14.6981164
-0.0369548
3.90692292
9.94690792
10.0486024
2.77892409
-17.624044
7.90418496
-7.264664
-15.807757
-20.909243
-10.119758
20.2116376
0.23108735
-9.7598691
-6.4235046
-9.0272859
-0.6674584
-0.0640183
-22.030625
3.32284759
-28.739825
17.1616042
10.9347875
-0.5418542
-2.035384
4.05420422
0.03010904
-4.5324505
-4.1710795
1.93425198
4.56937661
4.3126969

43.39342314
6.386107413
8.652659995
0.020203581
1.693004424
25.32342296
12.32313282
26.15005266
13.60501385
216.034626
0.001365656
15.26404668
98.9409772
100.97441
7.722419121
310.6069251
62.4761399
52.77534342
249.8851958
437.1964365
102.4095036
408.5102932
0.053401362
95.25504479
41.26141094
81.49189114
0.445500705
0.004098344
485.3484199
11.04131612
825.9775154
294.5206582
119.5695772
0.293605961
4.142788034
16.43657187
0.000906555
20.54310742
17.39790387
3.741330716
20.8792026
18.59935455

15-Jun-10
16-Jun-10
17-Jun-10
20-Jun-10
21-Jun-10
22-Jun-10
23-Jun-10
24-Jun-10
28-Jun-10
29-Jun-10
30-Jun-10
1-Jul-10
4-Jul-10
5-Jul-10
6-Jul-10
7-Jul-10
8-Jul-10
11-Jul-10
12-Jul-10
13-Jul-10
14-Jul-10
15-Jul-10
TOTAL

475.65
475.17
474.63
474.99
468.61
470.40
467.60
463.45
459.52
455.48
455.75
470.91
464.69
460.70
463.24
461.87
460.07
460.02
461.62
464.65
467.33
477.73

-0.002181561
-0.001014549
-0.001137555
0.000761641
-0.013515367
0.003812685
-0.005967946
-0.008926429
-0.008510037
-0.008844042
0.000603026
0.032723327
-0.013292389
-0.008624024
0.005496869
-0.002966675
-0.003913989
-0.000101335
0.003469973
0.006545457
0.005752156
0.022001454
-0.432017511

1.14628313
0.5330864
0.59771895
-0.4001981
7.10153642
-2.0033433
3.13580698
4.69031729
4.47152758
4.64702762
-0.3168551
-17.194198
6.98437422
4.53142096
-2.8882836
1.55881442
2.05657277
0.05324578
-1.8232681
-3.4392557
-3.0224222
-11.56048

Here,
Relative price change in market is calculated as:

Relative price change in Market (Rt) = ln(

Average log return over the period is calculated as:

Average log return (Rm) =

(i.e Rm = -0.001903161)

1.313965007
0.284181107
0.357267946
0.160158496
50.43181956
4.013384229
9.833285438
21.99907627
19.99455894
21.59486568
0.10039715
295.6404352
48.78148323
20.53377596
8.342182016
2.42990239
4.229491566
0.002835113
3.324306425
11.82847956
9.135035786
133.6446873
11055.51938

And,
Daily volatility or Standard deviation of log return can be calculated as:

Daily volatility (

)=

(i.e.

And,

Annual volatility (

(i.e.

)=

= 132.7048) where number of trading days in a year is considered 360

days.
Hence, the daily volatility is 6.99 and annual volatility is 132.70 as per NEPSE index
from Mid July 2009 Mid July 2010.