Using Adjusted Close Prices for Volatility Estimates

Summary

The discussion explains why adjusted closing prices are generally preferable to raw closes when estimating historical equity volatility. Adjustments for stock splits, dividends, distributions, and rights offerings help prevent corporate actions from appearing as market price moves. In particular, an unadjusted split can create a large artificial return and distort a volatility estimate with an outlier.

The answer recommends adjusted closes as a starting point, while noting that the right choice depends on the objective. Cash dividends and rights offerings may need separate treatment, so adjusted prices do not remove every methodological decision. The document gives conceptual guidance rather than a specific volatility formula, comparison of data vendors, or empirical test; it does not define a single adjustment convention for all analyses.

Key ideas

• Adjusted closes account for corporate actions that can distort returns computed from raw closes.
• A stock split can create an artificial price jump and inflate estimated volatility.
• Dividend and rights-offering adjustments may require special handling based on the analysis objective.

Tags

# Close price or adjclose price to calculate volatility?


# Close price or adjclose price to calculate volatility?












To calculate volatility, which price in FTSE table is used? When do we use close price for calculating volatility? Do we use adjclose (adjusted close price) for calculating volatility as well? when and how do we use adjclose price?

Thanks

## Answer by pincopallino (score 1)

https://quant.stackexchange.com/a/11047

The adjusted close price accounts for corporate actions such as stock splits and dividends, distributions and rights offerings (here)

Stock splits in particular would give the illusion of significant volatility and impact your estimates with outliers that are not due to market activity. Therefore, I would suggest using the adjusted close prices.

That said, and depending of what exactly you are trying to achieve, you may still need to treat cash dividends and rights offerings with special care.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.