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International comparisons of stock market volatility - Essay Example
Author : osbaldo46
Finance & Accounting
Pages 6 (1506 words)
International comparisons of stock market volatility Introduction The 2007/2008 global economic crises made the financial markets respond to the contagion effect. Contagion effect implies that when one sector fails due to some reasons, the impact will also be felt by other sectors…
Even researchers and practitioners have made modeling of stock volatility a subject of empirical and theoretical study. Historically, stock market volatility is approximately 20% per annum and 5.8% per month even though periods of high and low volatilities are experienced. During the financial crisis, there was a 50 percent drop in stock prices. The effects of the crisis are still being felt due to increased public and private debt, levels of unemployment and global capitalism. The governments are doing their best to prevent and contain the situation buy formulating new policies and reforming major sectors. Volatility measures the degree of variability between stock prices. In other words, it determines the degree of deviation between the current price of an asset and the average past price. To understand volatility, it is important to take a look at the nature and trends of global markets and the correlation of the stock market returns. For many investors, volatility is a risk, thus, it is to be taken into consideration in analyzing their portfolios. Some of the factors that lead to volatility include changes in technology, new financial instruments such as derivatives and the increased integration of global markets. Volatility is measurable, and the commonly used measure is Chicago Board Options Exchange Index (CBOE) of implied (VIX) volatility. ...