Talking Finance
Unbeständigkeit ist ein wesentliches Merkmal des Finanzmarktes und wird nicht von allen als negativ betrachtet. IAN MCMASTER erklärt den Grund.
Volatility
Let’s do a simple thought experiment. Imagine you have a monthly salary of €3,000 gross. This means that, ignoring any special payments, you are paid €36,000 over the year. Now, imagine that, instead of having the same salary each month, you are given the option of having a monthly salary that varies between €0 and €6,000 — and you never know in advance what you will earn each month. But over the year as a whole, you are still guaranteed to earn €36,000.
Which option would you choose? Most people would go for the constant salary, even though the annual salary is the same in both cases. They would prefer the certainty of knowing what they will earn each month — not least because they almost certainly have fixed monthly outgoings — to the monthly (though not annual) uncertainty and the potential salary fluctuations.
If we go further with this thought experiment and remove both the limits within which the salary can fluctuate and the annual guarantee — your annual salary could be higher or lower than €36,000 — the uncertainty increases further. Only those who really like taking risks would go for the variable and potentially highly volatile option rather than the fixed payments.
Something — or someone — that is “volatile” is likely to change quickly and unpredictably, often in a way that is seen as negative. So “volatility” is simply the tendency to change quickly and unpredictably.
Volatility is a key factor in economic life, not least in the stock, bond and currency markets. Here, it refers to the actual — or expected — swings in asset prices within a particular time period.
A number of indexes attempt to measure such volatility. One of the best known is the Volatility Index, or VIX, created by the Chicago Board Options Exchange (Cboe). This index measures the market’s expectation of volatility over the next 30 days of the S&P 500 index, or SPX, a key US stock market index. As the website Investopedia says, the index “provides a measure of market risk and investors’ sentiments”. It is also known as the “fear gauge” or “fear index” and is analysed by portfolio managers before taking investment decisions.
Since the crisis of 2007–08, the financial world has experienced a period of relatively low volatility. There have, however, been periodic spikes in the VIX, sparked recently, for example, by the uncertainty over the trade dispute between the US and China.
Although most of us regard volatility — both in asset prices and people — as negative, this view is not universally shared. When asset prices change rapidly, this creates investment opportunities for traders to buy and sell assets instantaneously and thereby make enormous profits in a short period of time.
On the other hand, long periods of low volatility can also be dangerous, as they encourage investors to take excessive risks, which, in turn, can cause the next financial crisis.
LOW VOLATILITY MAY ENCOURAGE INVESTORS TO TAKE EXCESSIVE RISKS