If the returns of an asset display a strong tendency for mean reversion, what is the relationship between annualized volatility calculated based on daily versus weekly volatilities (using the square root of time rule)?
A.
Either daily or weekly volatility will be greater, depending upon how the week went
B.
Daily and weekly volatilities will be the same
C.
Daily volatility will be greater than weekly volatility
D.
Weekly volatility will be greater than daily volatility
If returns display mean reversion, then clearly daily volatilities will be greater than weekly volatility, both annualized using the square root of time rule. Mean reversion would imply that the deviation from the mean will be lower over a longer time period than a shorter time period, and therefore annualized volatility based on daily volatility will be greater.
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