Börse Frankfurt News
Glossary term of the week: Volatility
Brexit, import tariffs and economic regression are, among other things, the breeding ground for the expected volatility on the securities markets in 2019. Even if expectations differ widely about the direction, most market commentators agree that it will be rough this year and price shaking will continue to increase. Reason for the stock market word of the week.
The higher the volatility, the higher the deviation, for example, of the share price from its average value. While the historical volatility refers to the fluctuation strength in the past, the implicit volatility measures the expected future fluctuation strength.
How does volatility arise?In addition to long-term price trends, volatility is a point-by-point phenomenon. The main drivers are changes in the opinions of traders and investors. All players react to uncertainties such as the events mentioned above or unexpected news according to their own expectations, trade directly or adjust price targets and limits.
What does volatility mean?Volatility is a risk indicator. It brings uncertainty for some, but opportunities for others.
Volatility is considered to be a major impellent for the German savings mentality, and the fact that it cannot be sustained is regarded as one of the reasons for the stock aversion here. And professional investors react with hedges to higher price fluctuations. But one person's suffering is another's joy.
Volatility sets the market in motion. Professional traders need deviations for entry and exit. Only volatility offers short-term traders opportunities - in both directions.
VDAX-New 2003-2018Source: ariva.de
How do you measure volatility?For historical volatility, the so-called standard deviation, the fluctuation of real values around a calculated moving average value, which can be represented as a curve or straight line, applies. Technical key figures are based on historical volatility.
Implicit volatility has now established itself in the market. It is based on the option prices and reflects the expectations that prevail in the market. The expected price fluctuations for all major markets are mapped in indices. The VDAX-New, for example, reflects the implied volatility of DAX shares over a 30-day period, the VSTOXX for the Euro Stoxx 50 and the VIX for the S&P 500.
Volatility is expressed in percent. A value of the VDAX-New of 20 percent means, for example, that market participants expect fluctuations of 20 percent around the DAX average over the next four weeks.
What is normal, low or high volatility?Which volatility is regarded as "normal" is a purely mathematical value and also depends strongly on the period in view. In recent years, the volatility of German equities has mostly been below 20 percent, but at the start of the stock market year 2019, the VDAX-NEW stood at 24 percent. Looking back a few decades, European stock markets show a typical volatility of 20 to 30 percent, US stock markets 15 to 25 percent.
2 January 2019, © Deutsche Börse AG