The Statistical Volatility

What is volatility? Why is understanding volatility important? Is there a recurring pattern in volatility? Putting simply volatility is a variation of prices over time. There are different types of volatility. In this update we have looked at historical volatility aka statistical volatility (SV).
Why is understanding volatility important? Everything animate is connected. Markets are alive owing to its participants and the sentiment they bring to the market place. This is why understanding market volatility gives us cues about market sentiment. If we can understand sentiment, we can understand biases, trends and inherent risks. Understanding sentiment will also suggest whether betting against sentimental investors is costly and risky or profitable.
We have mentioned this prior that volatility, sentiment like many other market variables behave counter intuitively. According to a research on ‘Investor Sentiment in the stock market’ by Malcom Baker and Jefrey Wurgler of NBER, “what has low sentiment in previous months delivers higher average returns and what has high sentiment in previous months delivers lesser average returns”. This again is an extension of the idea that worst performers end up outperforming the best performers. It also suggests that what is lackluster, uninteresting from a sentiment point of view is what will deliver. This all makes sentiment investing counter intuitive.

For more such interesting updates visit the Reuters Store or mail us for subscription details.

Dr. Ionut Nistor is the co-author of Performance Cycles paper published in Kyoto Economics Journal in March 2009. Ionut is a professor of Corporate Finance at Babes -Bolyai University and a post doctorate fellow at the Kobe University in Japan. He is fluent in Japanese, Romanian and English.

The Bric Model from a Japanese Perspective
Ionut Nistor – Econohistory