In past two years (2007 and 2008) we experienced unusual financial markets development with wild swings both up and down perfectly illustrated by single day plunges of 679 points (Oct. 9) and 778 points (Sept. 29) and 936 points increase (Oct. 13) all withing 11 trading days**. And for the simplicity purposes we happily ignore intraday volatility which presents us with some really quirky numbers. As all reaction has its action, even this new found volatility is not self-invented. Whether it is just a prelude for the upcoming recession or has less simple explanation is a still open discussion. One of many reasons might be return to pre-Volckerian monetary policy (interest rates as main tool for fine-tuning of economy) and focus of new chairman (Mr. Bernanke) on bringing more clarity into it as opposed to "if it's not broken, don't touch / don't repair / don't explain" approach of Mr. Greenspan.
Mr. Bernanke's background (inflation targeting expert and promoter) and well documented remarks in first years of his tenur might have had exactly opposite impact than the one intended and eventually could have brought confusion and increased volatility to markets . That the volatility of the US markets (precisely Dow Jones Industrial Average index - which is the best measure of the US financial markets anyway) increased in past two years is confirmed by computations summarised in the table below. If we adjust data for a first 100 days "grace period" the difference increases (mainly due to exclussion of 1987 financial market meltdown from Mr. Greenspan datafile which he could not affect or eliminate anyway), showing that in fact we are entering the age of turbulence. More detailed analysis of annualized volatility rates*** (both for actual trading days in a year and 252-trading days year) is presented at the end of the text.
| Standard deviations of continuosly compounded day-to-day DJIA closing values | |||
| Greenspan | Bernanke | ||
| Standard deviation (Stdev.) | 0.0111 | 0.0126 | |
| Stdev. adjusted for first 100 days | 0.0100 | 0.0133 | |
But is this volatility to continue? All evidence points out to the possitive answer to this question, meaning more uncertainity and damage to all investors. As previous slow-downs suggest higher volatility of financial markets in the periods of distress (see below and link) we should remember that technically we are still more or less not in the recession - although heading there at Jorg Haider speed. If Mr. Krugman's prediction will come true and the US and EU experience recessions in the immediate future (i.e. 2009 and beyond) we can expected increased volatility of financial markets in next years with new records for daily decreases and increases on pretty much regular basis. Ultimately this mean that smart investors can gain loads of money by entering and closing shor-term and/or intraday positions. On the other hand, all others (including me - to a great displeasure of my dad) should brace tehmeselves for a rough ride as they try to weather the downturn.
Unfortunately, governments with their bailout plans do not help to quickly resolve financial market crisis as participants keep testing the limits of government pockets and push for more (even by throwing word "panic" into the mix). By enabling them to do that, ultimately I might end up living in the country with the highest company private ownership participation rate in the world. Just don't tell me it is so bad or I am that smart and picked it upfront - all of us know it is not true :)
Note: * Be warned that as I did not read the book, basically I do not know what I am talking about. I did not have spare time for this type of "light reading" literature in past two years.
** For more details please refer to DJIA development chart available at any major financial portal.
*** Volatility is the most commonly measured as a standard deviation of continously compounded returns. This standard deviation is usually annualised in order to show comparable measures. Circa 252 trading days are within one year (in our sample it was the most common number of trading days) although differences arise (most notably in 2001 and the incomplete years at the begining and end of each chairman tenure).
| Annualized volatility | ||||
| Greenspan | Bernanke | |||
| act. days | 252-days | act. days | 252-days | |
| 2008 | 0.2784 | 0.3110 | ||
| 2007 | 0.1452 | 0.1455 | ||
| 2006 | 0.0302 | 0.1073 | 0.0937 | 0.0979 |
| 2005 | 0.1028 | 0.1028 | ||
| 2004 | 0.1082 | 0.1082 | ||
| 2003 | 0.1653 | 0.1653 | ||
| 2002 | 0.2540 | 0.2540 | ||
| 2001 | 0.2122 | 0.2139 | ||
| 2000 | 0.2074 | 0.2074 | ||
| 1999 | 0.1611 | 0.1611 | ||
| 1998 | 0.1985 | 0.1985 | ||
| 1997 | 0.1880 | 0.1876 | ||
| 1996 | 0.1201 | 0.1197 | ||
| 1995 | 0.0866 | 0.0866 | ||
| 1994 | 0.1090 | 0.1090 | ||
| 1993 | 0.0868 | 0.0866 | ||
| 1992 | 0.1035 | 0.1031 | ||
| 1991 | 0.1461 | 0.1458 | ||
| 1990 | 0.1635 | 0.1631 | ||
| 1989 | 0.1429 | 0.1429 | ||
| 1988 | 0.1823 | 0.1819 | ||
| 1987 | 0.3436 | 0.5427 | ||
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