Realized Volatility Estimation

Realized volatility estimation is the process of calculating the actual historical volatility of an asset based on high-frequency intraday data. It provides a precise measurement of market activity over a specific period, serving as a benchmark for comparing against implied volatility.

In crypto, this is often done by summing squared returns over short intervals, such as five-minute blocks. This method offers a more accurate picture of volatility than simple daily standard deviation, as it captures the intraday fluctuations that occur within the 24-hour cycle.

It is a foundational metric for evaluating the performance of volatility forecasting models. Traders use realized volatility to calibrate their hedging frequency and assess the effectiveness of their risk management strategies.

It essentially converts raw trade data into a concrete measure of realized market risk.