Time-Varying Volatility

For once, the name tells us exactly what’s going on here.

Time-varying volatility happens when the volatility, or variability, of a value changes over time. For example, we might track the volatility of a stock by calculating the the standard deviation of the prices over week-long periods. We then plot those standard deviations, or volatility values, over time...and examine the pattern we see. We might determine that the price shows extreme volatility in the summer months while remaining relatively stable during the winter months.