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Scaling by the square-root-of-time rule: An empirical investigation using five market indexes

Journal Article


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Abstract


  • The value of the theoretical constant used to scale daily volatility to both a five-day volatility estimate and a ten-day volatility estimate is compared with empirical estimates using a volatility modeling framework. Five composite stock indexes are analyzed to determine the different behaviors of scaling across markets. Both developed and emerging markets are considered, to provide additional detail to the comparisons. The results provided are considered in a value-at-risk application. While using the square-root-of-time rule on a weekly or ten-day basis is appropriate in certain cases, for time series with a linear dependence component the rule can drastically err from observed volatility levels. It is demonstrated that there are potential hazards when using the square-root-of-time rule for risk or compliance purposes.

Publication Date


  • 2016

Citation


  • Cameron, J., Gulati, C. & Lin, Y. (2016). Scaling by the square-root-of-time rule: An empirical investigation using five market indexes. Journal of Risk, 19 (2), 61-80.

Scopus Eid


  • 2-s2.0-84997610267

Ro Full-text Url


  • http://ro.uow.edu.au/cgi/viewcontent.cgi?article=7290&context=eispapers

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/6260

Number Of Pages


  • 19

Start Page


  • 61

End Page


  • 80

Volume


  • 19

Issue


  • 2

Abstract


  • The value of the theoretical constant used to scale daily volatility to both a five-day volatility estimate and a ten-day volatility estimate is compared with empirical estimates using a volatility modeling framework. Five composite stock indexes are analyzed to determine the different behaviors of scaling across markets. Both developed and emerging markets are considered, to provide additional detail to the comparisons. The results provided are considered in a value-at-risk application. While using the square-root-of-time rule on a weekly or ten-day basis is appropriate in certain cases, for time series with a linear dependence component the rule can drastically err from observed volatility levels. It is demonstrated that there are potential hazards when using the square-root-of-time rule for risk or compliance purposes.

Publication Date


  • 2016

Citation


  • Cameron, J., Gulati, C. & Lin, Y. (2016). Scaling by the square-root-of-time rule: An empirical investigation using five market indexes. Journal of Risk, 19 (2), 61-80.

Scopus Eid


  • 2-s2.0-84997610267

Ro Full-text Url


  • http://ro.uow.edu.au/cgi/viewcontent.cgi?article=7290&context=eispapers

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/6260

Number Of Pages


  • 19

Start Page


  • 61

End Page


  • 80

Volume


  • 19

Issue


  • 2