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Parkinson volatility

A range-based estimator using the high and the low of each bar. Roughly five times more efficient than close-to-close, but it ignores gaps.

The estimator is built from ln(High/Low) squared, scaled by 1/(4 ln 2), then annualised. Because the daily range carries more information about how far the price wandered than the close alone, you get a similar-quality estimate from far fewer bars.

Its blind spot is the overnight gap. A stock that closes at 100 and opens at 90 after earnings, then trades in a tight 90 to 91 range, will show almost no Parkinson volatility for that day despite a 10% move having happened. For gap-prone instruments this understates risk badly.

It also assumes continuous observation. Real highs and lows are sampled from discrete trades, so the observed range is slightly narrower than the true one, biasing the estimate low, more so in thin markets.

Related: garman-klass-volatility, yang-zhang-volatility, close-to-close-volatility, realised-volatility

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

A range beside a trendOne chart swinging between a flat floor and ceiling, another stepping upwards inside a pair of sloping lines.Range-boundresistancesupportprice bounces between two levelsTrendingthe trend channelhigher highs and higher lowsA range has two flat edges; a trend has two sloping ones.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.

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