Interview Question: Elusive Volatility

Sample Question #227 (case-type finance question)
 
Explain to me why it’s so difficult to model volatility, for example, the volatility of a stock or a bond.
 
(Comment: this question probes whether you understand the "big picture" of volatility modeling)
 
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One Response to Interview Question: Elusive Volatility

  1. Brett says:

    ANSWER
     
    This is a case question so the answer is open-ended.  Some of the reasons I can think of are:
     
    – volatility is not directly observable — you need to infer it from aggregate data
    – volatility is not easy to define
    – volatility involves "second order" statistics (e.g., 2nd moments)
    – it’s difficult to model anything in finance!
     

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