Region and country economic factor such as factor and interest rate policy, contribute to the directional changes of the market and thus volatility. For example in many countries, the central bank sets the short-term interest rates for overnight borrowing by banks. When they change the overnight rate can cause stock markets to react, sometimes violently.
Changes in inflation trends influence the long term stock market trends and volatility. Expanding price-earning ration (PIE ratio) tend to correspond to economic periods when inflation is either falling or is low and stable. This is when markets experience low volatility as they trend higher, on the other hands, period of falling PIE ratios tend to relate to rising or higher inflation periods when prices are more unstable. This tends to cause the stock markets to decline and decline and experience higher volatility.
Industry and sector factor can also caused increased stock market volatility. For example, in the oil sector, a major weather storm in an important producing area can cause price of oil to jump up. As a result, the price of oil-related stocks will suit some benefit from the higher price of oil, other will be hent. This increase volatility affects overall markets as well as individual stock.
Assessing current volatility in the market.
Using crestmont’s research, investors can use their understanding of the longer term volatility of the stock market to align their portfolios with the expected returns. But, how do we know if the market is experiencing higher volatility?
One way is to use the (BCE volatility index (vix). The vix measures the implied volatility (iv) in the prices of a basket of pin and can opinion on the S&P 500 index. The vix is used as a tool to measure investor risk. A higher reading on the vix makes periods of higher stock market bottoms. Low readings on the vix market periods of lower volatility. The periods of low volatility may last several years and are not a good, for identifying market tops. The vix is intended to be forward looking, measuring the market is expected volatility over the next 30 days.
As a general trend, when the vix rises the S&P 500 drops. When the vix is at a high, the S&P 500 is at a low which may be a good time to buy. However, if the vix is high, there is a concern that the market is going continue to go down. This fear makes it difficult method of econometric analysis. The study revealed that the relationship. The fear makes it difficult to buy during high stock market volatility. But, investor who used the high on the vix to time their buy entered the market at or new the low volatility works well to help identify market bottoms based on high volatility. For long-term investors, it also does a pretty good job of helping to identify that the stock market is at or near a top, when volatility is very low, keep in mind that this indicator is not intended to time the exact top. But rather that the volatility of the market does not stay substantially below the mean for a long period of time. As the volatility increase, then the market performance will tend to decrease.
2.1.6 THE CYCLICAL VOLATILITY OF INTEREST RATES
The variability short-term and long-term interest rate is a prominent feature of the economy. Interest rates change in response to a variety of economic events, such as changes in federal policy, crises in domestic and international financial markets, and changes in the prospects for long term economics growth and inflation. However, economic events such as these tend to be irregular. There is a more regular variability of interest rate associated with the business cycle, the expansions and contractions that the economy experience overtime. For example, short-term interest rate rise in expansions and fall in recessions. Long term interest rate do not appear to co-vary much with the level of economic output.
The term cyclical volatility of interest rate refers to the variability of interest rate over periods that correspond to the length of the typical business cycle. In this article, we will example some facts and theory about the cyclical volatility of short-term and long-term interest rate. Why should we care about interest rate volatility? How do short term and long time interest rate behave over the business cycle! What determines the cyclical volatility of interest rate associated with different maturities of government bonds? These questions are important to ask and answer as we seek a fuller understanding of the dynamic of the business cycle in market economic.
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