11.10.2011

Ongoing Macro Concerns Drive Volatility

11.10.2011
Terry Flanagan

Continuing macroeconomic issues in the global economy have been one of the main factors driving market volatility.

With the market tumult continuing amid economic concerns and fragile investor confidence, volatility looks to become the new norm for the foreseeable future.

“There is significant interconnectedness in the world, what’s happening in Europe is playing a bigger role than it did,” Timothy Hurley, managing director of investment bank Bentley Associates, told Markets Media.

As the global economic uncertainty continues to drag on, it is casting an increasingly negative light on the stability of the markets and is forcing many investors to the sidelines.

“You don’t see the market moving on fundamentals, you get these up and down movements that suggest instability, said Hurley. “Investors see volatility, and sit on their hands for a while until it goes back to normal. Everyone is thinking the wheels are coming off in Europe. I think Europe will continue to have an adverse effect on the U.S. markets. We’re in for a mediocre market here for the next few months at least.”

The most recent surge in volatility comes in the wake of the MF Global collapse as well as the ongoing uncertainty surrounding the European debt crisis. The Chicago Board Options Exchange’s Volatility Index, or VIX, reached a high of 48 on Aug. 8, as the markets reacted to the U.S. debt ceiling negotiatons and the Standard & Poor’s downgrade of U.S. debt. It then fluctuated through the mid-30s until spiking up to above 45 in early October, once again as European debt concerns came to a head. In late October, the VIX had declined to about 25. As of mid-day Nov. 10, the VIX was trading at about 34.

Although there are certain classes of investors that shy away from the markets during times of volatility, the trading volume statistics paint a different picture. During large single day spikes in volatility, equities trading volume also follows suit. The most recent case of this was on Nov. 9, when the VIX shot up 33% to 36 from 27 the day before, which coincided with a 21% increase in trading volume.

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