Historical Variance Estimation

Historical Variance Estimation is the calculation of the spread of asset returns around their mean over a past period. It provides a concrete measure of the risk associated with an asset based on its past performance.

This metric is fundamental to the construction of risk-parity portfolios and the setting of stop-loss levels. In the crypto domain, historical variance is often much higher than in traditional assets, necessitating more robust estimation techniques that can handle non-normal return distributions.

By using rolling windows of data, analysts can track how the risk profile of an asset evolves over time. This data is essential for stress testing portfolios against historical market crashes.