Logarithmic Returns
Logarithmic returns are the natural logarithm of the ratio of an asset's current price to its previous price. They are preferred in quantitative finance because they are time-additive and often follow a normal distribution more closely than simple percentage returns.
When modeling price paths, using log returns allows for simpler mathematical operations, such as summing returns over multiple periods. This is particularly useful when calculating volatility or performing simulations like Monte Carlo analysis.
Log returns also help in handling the compounding nature of investment growth over time. In the context of crypto volatility, they provide a standardized way to compare assets across different timeframes.
They are a foundational tool for any analyst or trader working with statistical models of financial data.