Volatility is considered the most accurate measure of risk and, by extension, of return, its flip side. The higher the volatility, the higher the risk – and the reward. That volatility increases in the transition from bull to bear markets seems to support this pet theory. But how to account for surging volatility in plummeting bourses? At the depths of the bear phase, volatility and risk increase while returns evaporate – even taking short-selling into account.
“The Economist” has recently proposed yet another dimension of risk:
“The Chicago Board Options Exchange’s VIX index, a measure of traders’ expectations of share price gyrations, in July reached levels not seen since the 1987 crash, and shot up again (two weeks ago)… Over the past five years, volatility spikes have become ever more frequent, from the Asian crisis in 1997 right up to the World Trade Centre attacks. Moreover, it is not just price gyrations that have increased, but the volatility of volatility itself. The markets, it seems, now have an added dimension of risk.”
Call-writing has soared as punters, fund managers, and institutional...
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