Data Mixed on Whether Volatility Is Rising

An analysis of historical price movement among exchange-listed stocks found that the answer to the question of whether stocks have become more volatile will vary if volatility is considered on a daily basis or a monthly basis.

Whether or not stocks have become more volatile depends on whether a person considers volatility on a daily basis or on a monthly basis. This is the finding of an analysis of price movement among exchange-listed stocks for the period of 1926 through 2014.

Not surprisingly, volatility was the highest during the Great Depression. The period of 1931 through 1935 was particularly volatile, with 63% of all monthly price changes exceeding 5% (meaning monthly gains or losses in excess of 5%). In contrast, volatility during the years of 2006 through 2010—which include the financial crisis—was only slightly above average. This more recent period experienced 19 months with monthly price changes in excess of 5% versus the historical average of 16.

When volatility is measured as a daily change in stock prices of at least 2%, the early 1930s still stand out. There were 347 trading days between 1931 and 1935 when price changes were beyond the 2% threshold. In other words, daily price changes exceeded 2% during nearly a quarter of all trading days during that period. Ranking a distant second was the 2006 through 2010 period, when slightly less than 13% of trading days experienced price changes of greater than 2%.

As far as changes in volatility over time are concerned, no discernible trend in monthly volatility exists. Average monthly volatility jumped during the Great Depression, but has both risen and fallen during the years since. Daily volatility, however, has been rising by about 0.007% each day since 1926. Daily volatility has been gradually increasing since 1940.

Of course, most investors don’t mind when volatility occurs to the upside, but are concerned when it occurs to the downside. This is logical since downward price moves reduce wealth. Plus, we feel greater pain from losses than we derive pleasure from gains. Over the long term, there are more downward volatile days than upward volatile days, but the difference is small (a 0.52 ratio, suggesting slightly more downside relative to upside volatility, with a ratio of 0.50 signaling an equal split.) There is no clear trend of downside volatility increasing relative to upside volatility or upside volatility increasing relative to downside volatility, however.

Source: “The Increasing Volatility of the Stock Market?,” Kenneth M. Washer, Randy Jorgensen and Robert R. Johnson, The Journal of Wealth Management, Summer 2016.