Converting 1-Day Volatility to h-Day Volatitlity: Scaling by Root-h is Worse Than You Think

Francis Diebold, Andrew Hickman, Atsushi Inoue and Til Schuermann

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: We show that the common practice of converting 1-day volatility estimates to h-day estimates by scaling by the sqaure root of h is inappropriate and produces overestimates of the variability of long-horizon volatility. We conclude that volatility models are best tailored to tasks: if interest centers on long-horizon volatility, then a long-horizon volatility model should be used. Economic considerations, however, confound even that prescription and point to important directions for future research.

Date: 1997-07
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