RECENT LOW VOLATILITY
As can be seen from Figures 16-3 and 16-4, volatility in 2005 and 2006
was among the lowest in history. There are goods reasons for this: (1)
lower economic volatility as the business cycle is muted, (2) the global-
ization of financial markets that allows investors to diversify risks, and
(3) the increased liquidity of markets that allows capital to be instantly
allocated to take advantage of profitable opportunities.
But too much stability invites firms and investors to take increasing
risk and leverage their positions with lower-cost debt. This means that
investors should not become sanguine about recent low volatility. The
interconnectedness of markets, for all its benefits, invites global volatil-
ity because bullish and bearish sentiment cannot be contained to one
market.THE DISTRIBUTION OF LARGE DAILY CHANGES
Chapter 13 noted that there were 126 days from 1885 through 2006 when
the Dow Jones Industrials changed by 5 percent or more: 59 up and 67
down. Seventy-nine of these days, or nearly two-thirds of the total, oc-
curred from 1929 through 1933. The most volatile year by far in terms of
daily changes was 1932, which contained 35 days when the Dow moved
by at least 5 percent. The longest period of time between two successive
changes of at least 5 percent was the 17-year period that preceded the
October 19, 1987, stock crash.
Some of the properties of large daily changes are displayed in Fig-
ure 16-5. Monday has seen only slightly more large changes than the rest
of the week, and Tuesday has seen significantly fewer. Monday has the
largest number of down days, but Wednesday has by far the highest
number of up days.
Thirty of the large changes occurred in October, which has wit-
nessed more than twice the large moves as any other month. October’s
reputation as a volatile month is fully justified. Not only has October
witnessed nearly one-quarter of all big moves but it has also seen the
two greatest stock crashes in history, in October 1929 and October 1987.
It is interesting to note that nearly two-thirds of the large declines have
occurred in the last four months of the year. Chapter 18 presents the sea-
sonal aspects of stock price changes.
One of the most surprising bits of information about large market
moves relates to the period of the greatest stock market collapse. From
September 3, 1929, through July 8, 1932, the Dow Jones IndustrialsCHAPTER 16 Market Volatility 283