The extreme volatility that markets have experienced in the last weeks is actually no more intense than during previous periods of disruptive macro global forces, say researchers at the Vanguard Group.
Between August 5 through August 30, the S&P 500 Index averaged a 2.5 per cent move (up or down) every day, far above the range of the preceding months.
Some market watchers have suggested that the high volatility was exacerbated by structural changes, such as the growth of hedge funds, high-frequency trading, quantitative investment programs, and leveraged, inverse exchange-traded funds.
Not so, say the researchers, Francis Kinniry, Todd Schlanger and Christopher Philips.
They found that between July 1992 through August 30, 2011, the S&P 500 Index averaged daily price movements of 0.7 per cent per day, excluding the periods of disruptive global macro events.
During these stress periods, the average daily price movements doubled to 1.46 per cent per day. “The impact of the most recent environment on market volatility is at least on a par with that of previous market dislocations,” they conclude.
“We would argue that August’s volatility in equities, although high and painful to many investors, was not unexpected, given the market environment and the widespread re-pricing of risk. Thus, in Vanguard’s view, to cast the current environment as a 'new paradigm' of volatility is misleading.”