Annualisation
Why is volatility measured over a single week quoted as a yearly figure, and what does that number actually describe?
In plain words
Annualisation restates a statistic measured over a short window as the figure you would expect over a full year. Volatility scales roughly with the square root of time, so a week's swings are converted into a yearly rate that can be compared with other markets and other periods.
Why it matters
A raw weekly volatility number is hard to compare across assets, windows and years. Quoting it as an annual rate puts every market on one scale, so a single figure can be weighed against other markets or other weeks directly. It describes the pace of movement, not the direction or the size of any single move.
In a real week: BTC, week of 29 January 2024
In the week of 29 January 2024, BTC moved from an open of 42031.05 to a close of 42582.88, a 1.31% gain, with a range of 4.97% between the low of 41804.88 on Monday and the high of 43882.36 on Tuesday. Its realised volatility over that single week was 37.1% a year. The largest one-hour move was -1.83% on Wednesday.
A common mistake
Reading an annualised figure as a prediction that the market will move that far over the next year. It is a restated measurement of a past window, and the next week can be far quieter or far wilder.