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.
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Craig Erlam
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