Is Standard Deviation a Good Measure of Volatility? the Case of African Markets with Price Limits

Eymen Errais and Dhikra Bahri
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Eymen Errais: LAREQUAD, FSEGT, University of Tunis El Manar
Dhikra Bahri: Ecole Nationale dIngenieurs de Tunis, University of Tunis El Manar

Annals of Economics and Finance, 2016, vol. 17, issue 1, 145-165

Abstract: Investment decisions are often based on the analysis of two main investment components: risk and return. In many instances risk is measured by the standard deviation of the asset returns. For portfolio managers who are trading cross different assets and countries, the exercice could be tricky as price limits could vary from a country to another. When price limits are imposed, the observed prices are truncated and the equilibrium prices are unobservable. This adds a bias to the estimation of standard deviation and hence the volatility. In this paper, we tackle this issue of biasness by proposing a methodology that correct this bias in order to get more efficient risk estimates. Two approaches are proposed. The first one is based on stochastic volatility models and the second one on options pricing. We perform a step by step numerical application that displays a clear bias coming from price limits.

Keywords: Stochastic Volatility; Price Limits; Truncated Time Series; Censored Variables (search for similar items in EconPapers)
JEL-codes: C63 G11 G15 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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