Realized volatility is a backward-looking measure of how much an asset’s returns varied over a completed observation interval. It is calculated from a past return series rather than inferred as the volatility input consistent with current option prices. That separates it from implied volatility: implied volatility is extracted from option prices for a future horizon, whereas realized volatility summarizes variability that has already occurred.
The number depends on the measurement rule
A common close-to-close construction starts with periodic returns, often logarithmic returns such as r = ln(Pt/Pt−1), calculates their standard deviation over a chosen lookback window, and scales the result to an annualized figure using the square root of a stated number of periods per year. But “realized volatility” does not identify one universal estimator. Researchers can choose simple or log returns, demean returns or set the mean to zero, use different lookback lengths, sample at different frequencies, include or exclude overnight moves, and apply different annualization conventions. Two defensible calculations can therefore produce different values from the same market history.
This distinction becomes especially important with intraday data. A 20-day close-to-close measure answers a different question from a one-day measure built from five-minute returns. In high-frequency work, a standard realized-variance estimator is the sum of squared intraday returns; taking its square root gives a realized-volatility measure for that interval, which may then be annualized for comparison. The naming and scaling conventions used by data providers and researchers are not perfectly uniform.
Finer sampling can add noise as well as information
More frequent observations can capture price movement that daily closes miss, but extremely fine sampling can also admit market-microstructure effects such as bid–ask bounce and other transaction-price noise. The useful sampling interval therefore depends partly on the market’s liquidity and trading structure. Session boundaries matter as well: an intraday calculation confined to regular-session observations excludes price changes outside that sampled session unless they are incorporated separately.
For traders and researchers, a realized-volatility percentage is therefore incomplete without its observation window and estimator conventions. Meaningful comparison requires the return definition, sampling frequency, session coverage, lookback horizon, and annualization basis to be aligned. This is particularly important when realized volatility is compared with implied volatility or used in work on the volatility risk premium. Realized volatility measures past variability; it does not by itself reveal price direction, explain why volatility occurred, or specify the volatility that will be realized next.