InvestorQ : What do we understand when we talk about volatility in markets?
Nishant Chandani made post

What do we understand when we talk about volatility in markets?

Answer
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Abhisha Yadav answered.
2 years ago


Volatility in markets is best understood by the fluctuations or the variance in returns. You can look at it intuitively. If you take the price chart of the last 3 months and if you find it fluctuating like a typical doctor’s ECG chart then it is a volatile market. Normally, all markets are volatile but it is the range matters more. Is the stock or the index volatile in a range of 5% or 15% will decide the risk element? Over the last few years, the NSE publishes the VIX (Volatility Index), which shows how the volatility in the stock markets is moving. The crux of the matter is that volatility is a measure of risk and this risk constitutes the second important dimension of investing after return. In fact, it is your risk appetite that eventually determines your investment mix.
Risk is so important that the celebrated writer, Peter L Bernstein, in his landmark book, 'Against the Gods', specifically mentions that “The real reason for progress in the 20th century is due to our ability to understand measure and manage risk more effectively”.
The risk in markets is best understood in terms of volatility in markets. Now, what causes volatility? There are a variety of factors at play here. Firstly, domestic valuation concerns can cause volatility in the markets. Similarly, a preponderance of traders trying to punt the markets can also cause volatility. When too many long and short positions vie with one another it shows up in the form of volatility. Secondly, government policy can cause macroeconomic certainty and lead to volatility in the markets. Thirdly, global events also play a key part. For example, the Fed rate moves, China trade numbers, a geopolitical risk of North Korea and West Asia; all these factors contribute to volatility. In the last few weeks, we have seen factors like Turkish Lira and the likely trade war making the markets very volatile.