1	Stock Volatility: Past, Present & Future G. William Schwert Simon School Alumni Council October 17, 2008 (Data updated through 10/14/2008) http://schwert.ssb.rochester.edu/volatility_2008.htm
2	What is market volatility? Standard deviation of rates of return to broad market indexes Following plots show: Changes in Dow Jones Industrial Average from 1893-2008 Affected by growth in the level of the index Percent changes in DJIA (rates of return, ignoring dividends) from 1893-2008 Rolling annualized standard deviations of rates of return to DJIA from 1893-2008
3	Looking at the Absolute Scale of Stock Indexes is Very Misleading . . . The sixty largest changes in the DJIA have been within the last 11 years The only exception among these sixty days is Oct 19, 1987
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6	Looking at the Percent Change of Stock Indexes is Relevant . . . This measures the rate of return on the investment i.e., how many more dollars you would have at the end of the day if you invested $100 at the beginning of the day The sixty largest percent changes in the DJIA (or the S&P 500) have been before the last 10 years The only exceptions among these sixty days are in 1997, 1998, after 9/11/2001, in 2002, and three times recently
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9	How to Lie with Statistics . . . - Focus on very recent history Newspapers often focus on the last few years in discussing current conditions On this basis, people would think stock volatility is very high in recent months . . . This is incredibly misleading when viewed from the perspective on the longer history we have available to us Compare the plots of rolling standard deviations from 2004-2008 versus the plot from 1893-2008 . . .
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12	Stylized Facts/Questions Market-level volatility has been remarkably stable over time Data back to 1802, covers many wars, financial crises, depressions/recessions Also, major changes in the composition of the US economy Mainly banks, insurance companies, canals in early 1800s Railroads started being important after 1834 Great Depression is the most notable period of prolonged high volatility
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16	Implied Volatility: S&P vs. Nasdaq Next figure shows the implied volatility series published by CBOE with ticker symbols VIX (S&P) and VXN (Nasdaq) VXN is much higher, especially in 2000-2002 These measures represent forecasts of future volatility (covering the span of the underlying index options, usually about a month)
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19	Recent Issues: Nasdaq Bubble? 2000-2002 was a period of high volatility for Nasdaq/technology stocks This seems to have returned to more normal levels in the last couple of years It turns out that the high volatility was primarily in technology stocks, independent of firm size, exchange listing, or age of the firm
20	Technology Portfolios Next figure shows historical volatility for: S&P Technology portfolio, Nasdaq Computer, Biotech, and Telecom, and the CBOE Technology portfolios They all move together, increasing substantially since mid-1998 Decreasing in 2003 Not increasing as much lately
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22	Is It the IPO Market? Next figure shows the number of IPO's per month and the average initial return to IPO investors Initial returns (underpricing) were very high from early 1999 through mid-2000 Volatility of IPO returns is usually very high when average returns are also high Some periods/types of deals are very hard to price accurately!
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24	Foreign Markets – FTSE (UK) Volatility now is similar to late 90’s early 2000’s, and similar to US levels Also similar to 1973-74 (first OPEC crisis) Exchange rate volatility is higher recently, but small compared with stock volatility
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26	Summary Market-level volatility often rises after prices fall Recent relatively good performance of the market is consistent with the lower levels of volatility [pro-cyclical] Inflation of Index levels exaggerate perceptions of increased volatility
27	Should Someone Try to Lower Volatility? If So, How? Margin requirements? Regulation of trading? Taxes on Trading? STTs These all seem like bad ideas