Book 4. Reading 21. Page 27 (Chapter 1).
If a variable’s returns process is mean reverting, the square root rule overstates long horizon volatility.
If a variable’s volatility process is mean reverting, the square root rule overstates long horizon volatility IF today’s vol. exceeds the long run mean of vol. and understates long horizon volatility IF today’s vol. is below the long run mean of vol.
Hope I have this right. Now, if the variable’s returns are mean reverting but its volatility today is below the LRM of its volatility, would these two effects cancel out and the square root rule will be more accurate?
Does it depend on which effect is more dominant, if so how do you know?
Thanks.