Should We Be Worried About Low Volatility?

Investors and policy makers who have worried about the historic slide in stock volatility the past year might have had good reason to do so: most market crashes are preceded by exactly that pattern.

A study of 40 financial-asset bubbles conducted by researchers including Didier Sornette at the Swiss Finance Institute concluded that in about two-thirds of the cases the crashes followed a spell of lower volatility — the “lull before the storm.” The study didn’t comment on current market levels.

“Our main finding is that volatility is neither a reliable indicator of the maturation of a bubble nor of its impeding ending in a crash,” Sornette and his colleagues wrote in a study posted last month. That in turn casts “doubts on the supposed general relationship between risk and return,” they concluded.

Bloomberg

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.