Volatility Analysis
that the change in the rate of change for both stocks is zero per period. Stock B
would not be regarded as more volatile, even though it is rising at a rate of $2
per period as compared to Stock A’s $1 per period. It is the change in the rate
of change in price from one period to the next that we are measuring, not the
amount of price change per period. In short, when stocks are rising at constant
amounts of price change per period, the change in the rate of change in price will
be zero. Hence, it is not possible to determine which stock is more volatile via the
first measure. Changes in the rate of change are characterized as acceleration and
deceleration in price, unlike a constant rate of change in price.
Let us now consider a scenario of a stock rising by increasing changes in price
per period. See Figure 21.3.
In this scenario, Stock B has a greater change in the rate of change in price,
rising at a rate of 100 percent per period, whereas Stock A’s change in the rate
of change in price is 0 percent per period, that is, a constant change in price
per period. Therefore, by way of the first measure of volatility, Stock B is now
regarded as more volatile. Notice that Stock B is undergoing acceleration in price
whereas Stock A is moving at a constant speed. See Figure 21.4.figure 21.2 Constant Rates of Change in Price.figure 21.3 Different Rates of Change in Price.