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

Author

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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)

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.

Suggested Citation

  • Eymen Errais & Dhikra Bahri, 2016. "Is Standard Deviation a Good Measure of Volatility? the Case of African Markets with Price Limits," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 145-165, May.
    • Handle: RePEc:cuf:journl:y:2016:v:17:i:1:errais
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    More about this item

    Keywords

    Stochastic Volatility; Price Limits; Truncated Time Series; Censored Variables;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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