Stock Volatility: Past, Present & Future

Transcription

1 Stock Volatility: Past, Present & Future G. William Schwert Simon School Alumni Council October 17, 2008 (Data updated through 10/14/2008)

2 What is market volatility? Standard deviation of rates of return to broad market indexes Following plots show: Changes in Dow Jones Industrial Average from Affected by growth in the level of the index Percent changes in DJIA (rates of return, ignoring dividends) from Rolling annualized standard deviations of rates of return to DJIA from

3 Looking at the Absolute Scale of Stock Indexes is Very Misleading... The sixty largest changes in the DJIA have been within the last 11 years The only exception among these sixty days is Oct 19, 1987

4 Daily Changes in the Dow Jones Industrial Average, ,200 1, , G. William Schwert,

5 The Thirty Largest Daily Increases and Decreases in the Dow Jones Industrial Index, (T=34,118) DJIA Chg Ret Std DJIA Chg Ret Std % 43.54% % 68.53% % 29.12% % 32.58% % 54.10% % 37.34% % 27.78% % 46.98% % 29.34% % 42.13% % 30.69% % 24.37% % 49.67% % 21.72% % 82.05% % 33.78% % 27.45% % 34.21% % 30.64% % 31.94% % 22.24% % 27.27% % 13.04% % 37.79% % 17.47% % 42.15% % 27.18% % 35.80% % 22.19% % 36.66% % 31.62% % 34.78% % 18.24% % 20.86% % 25.84% % 20.86% % 37.57% % 34.17% % 24.39% % 17.82% % 48.57% % 25.32% % 12.86% % 24.13% % 15.73% % 29.19% % 17.73% % 23.05% % 15.76% % 28.15% % 19.68% % 20.50% % 23.79% % 38.45% % 32.50% % 20.92% % 48.06% % 26.24% % 22.50% % 30.77%

6 Looking at the Percent Change of Stock Indexes is Relevant... This measures the rate of return on the investment i.e., how many more dollars you would have at the end of the day if you invested $100 at the beginning of the day The sixty largest percent changes in the DJIA (or the S&P 500) have been before the last 10 years The only exceptions among these sixty days are in 1997, 1998, after 9/11/2001, in 2002, and three times recently

7 Daily Returns to the Dow Jones Industrial Average, % 15% 10% 5% 0% -5% -10% -15% -20% -25% G. William Schwert,

8 The Thirty Largest Daily Percent Increases and Decreases in the Dow Jones Industrial Index, (T=34,118) DJIA Chg Ret Std DJIA Chg Ret Std % 82.05% % 67.27% % 57.25% % 76.05% % 67.23% % 82.88% % 89.96% % 60.42% % 39.27% % 68.53% % 31.24% % 93.80% % 58.44% % 47.49% % 32.67% % 48.33% % 97.05% % % % 45.61% % 55.84% % 39.81% % 58.11% % 35.21% % 53.56% % 54.10% % 43.44% % 29.02% % 82.72% % 29.34% % 58.15% % 65.12% % 34.25% % 29.12% % 36.25% % 42.63% % 57.97% % 38.29% % 70.53% % 43.54% % 41.97% % 26.69% % 48.57% % 25.89% % 51.72% % 38.23% % 44.00% % 91.60% % 51.37% % 29.89% % 40.46% % 49.77% % 37.02% % 38.97% % 37.34% % 29.40% % 48.97% % 24.27% % 48.16% % 30.69% % 62.21%

9 How to Lie with Statistics... - Focus on very recent history Newspapers often focus on the last few years in discussing current conditions On this basis, people would think stock volatility is very high in recent months... This is incredibly misleading when viewed from the perspective on the longer history we have available to us Compare the plots of rolling standard deviations from versus the plot from

10 Volatility of the Dow Jones Industrial Average, % 70% Annualized Standard Deviation of Returns 60% 50% 40% 30% 20% 10% 0% G. William Schwert,

11 Volatility of the Dow Jones Industrial Average, % 100% Annualized Standard Deviation of Returns 80% 60% 40% 20% 0% G. William Schwert,

12 Stylized Facts/Questions Market-level volatility has been remarkably stable over time Data back to 1802, covers many wars, financial crises, depressions/recessions Also, major changes in the composition of the US economy Mainly banks, insurance companies, canals in early 1800s Railroads started being important after 1834 Great Depression is the most notable period of prolonged high volatility

13 Annualized Standard Deviations of U.S. Stock Returns from Monthly Returns in the Year, % 60% Return Standard Deviation per Month 50% 40% 30% 20% 10% 0%

14 Annualized Standard Deviations of U.S. Stock Returns from Monthly Returns in the Year, % 60% Return Standard Deviation per Month 50% 40% 30% 20% 10% War of 1812 Mexican-American War Civil War World War I World War II Korean War Viet Nam War Afghan-Iraq War 0%

15 Annualized Standard Deviations of U.S. Stock Returns from Monthly Returns in the Year, % Return Standard Deviation per Month 60% 50% 40% 30% 20% Recessions in red 10% 0%

16 Implied Volatility: S&P vs. Nasdaq Next figure shows the implied volatility series published by CBOE with ticker symbols VIX (S&P) and VXN (Nasdaq) VXN is much higher, especially in These measures represent forecasts of future volatility (covering the span of the underlying index options, usually about a month)

17 Implied Volatility for S&P 500 (VIX) and Nasdaq 100 Portfolio (VXN), Annualized Standard Deviation of Returns, % 120% Implied Annual Standard Deviation of Returns 100% 80% 60% 40% VIX 20% 0% VXN G. William Schwert,

18 Implied Volatility for Nasdaq 100 Portfolio (VXN) Relative to S&P 500 (VIX), Annualized Standard Deviation of Returns, % 300% 250% Ratio of VXN to VIX 200% 150% 100% 50% 0% G. William Schwert,

19 Recent Issues: Nasdaq Bubble? was a period of high volatility for Nasdaq/technology stocks This seems to have returned to more normal levels in the last couple of years It turns out that the high volatility was primarily in technology stocks, independent of firm size, exchange listing, or age of the firm

20 Technology Portfolios Next figure shows historical volatility for: S&P Technology portfolio, Nasdaq Computer, Biotech, and Telecom, and the CBOE Technology portfolios They all move together, increasing substantially since mid-1998 Decreasing in 2003 Not increasing as much lately

21 Volatility for Several Indexes of Technology Stocks, Annualized Standard Deviation of Returns, % Nasdaq Computers (NASCMPT) Nasdaq BioTech (NASBIOT) Nasdaq Telecom (NASTELC) S&P 500 Technology (SPHTEC) CBOE Tech (TXX) 100% 80% 60% 40% 20% 0% Volatility (Annualized Standard Deviation of Return)

22 Is It the IPO Market? Next figure shows the number of IPO's per month and the average initial return to IPO investors Initial returns (underpricing) were very high from early 1999 through mid-2000 Volatility of IPO returns is usually very high when average returns are also high Some periods/types of deals are very hard to price accurately!

23 200% Mean and Standard Deviation of Initial Returns to IPOs and the Number of IPOs by Month, Std Dev Mean Number of IPOs % % 50% % 50-50% Monthly Percentage Return to IPOs Number of IPOs per Month

24 Foreign Markets FTSE (UK) Volatility now is similar to late 90 s early 2000 s, and similar to US levels Also similar to (first OPEC crisis) Exchange rate volatility is higher recently, but small compared with stock volatility

25 Dollar Volatility of FTSE All Shares and FTSE 100 Indexes, % FTSE All ($) FTSE 100 ($) FX ($/L) 80% Annualized Standard Deviation of Dollar Returns 70% 60% 50% 40% 30% 20% 10% 0% Dec-68 Dec-70 Dec-72 Dec-74 Dec-76 Dec-78 Dec-80 Dec-82 Dec-84 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 G. William Schwert,

26 Summary Market-level volatility often rises after prices fall Recent relatively good performance of the market is consistent with the lower levels of volatility [pro-cyclical] Inflation of Index levels exaggerate perceptions of increased volatility

27 Should Someone Try to Lower Volatility? If So, How? Margin requirements? Regulation of trading? Taxes on Trading? STTs These all seem like bad ideas