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How is volatility calculated?
Answer
At XE, volatility is measured by applying the standard deviation of the logarithmic daily returns, expressed in a percentage score.
Daily returns are the gain or loss of a currency pair in a particular period. At xe.com, we take the values of two consecutive days at 00:00 UTC. That is why we call it daily return. Then, we apply a logarithm to the ratio between those two values. It is a common way to measure change in the financial industry.
Ex: ln (valueDay2 / valueDay1) is the logarithmic return between day2 and day1. This value tells us if the currency pair has moved a lot or not.
In statistics, the standard deviation is a measure that is used to quantify the amount of variation of a set of data values. A low standard deviation indicates that the data points tend to be close to the mean of the set, while a high standard deviation indicates that the data points are spread out over a wider range of value.
We apply this standard deviation to the daily logarithmic returns we calculated during a given time period (30 days, 90 days etc.)
Expressing a value in a percentage score means we multiply it by 100 before showing it to you.
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