Financial Econometrics. Why we Should Worry about Volatility

Why we Should Worry about Volatility
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Introduction
Volatility refers to fluctuations in the price of a commodity in the market. In this aspect, it is measured by daily differences (in terms of percentage) in the price of the specified commodity. In terms of the stock market, volatility is a measure of the dispersion of returns for a given market index or security (Gatheral et al., 2018). For instance, if the stock market increases and decreases more than 1% over a period, such a market is described as volatile. The core characteristic of a volatile market is the wide price fluctuation as a result of heavy trading. Volatility in prices (or stock market) has both advantages and disadvantages. The advantages are desirable, but they only favor a few people in the market. The disadvantages, however, should be a cause of concern because they affect a large number of people, and especially those in vulnerable situations like small scale farmers.
Factors that Cause Volatility
Driving forces behind fluctuation have a direct impact on the volatility of a market. Such forces include changes in national economic policy, economic crises, economic indicators, political developments, public relations, and unstable overseas prices. The COVID-19, for instance, has led to an economic crisis affecting the world today. As a result, the world has experienced negative oil prices and therefore, making oil market volatile. Short-term policy changes in the Federal Reserve System results in drastic changes in the market, including the US Dollar Index. Due to globalization, modern economies are interconnected so that abroad events might affect local prices. Examples of such events include changes in regimes and war.
Advantages of Volatility
Investors are the more likely beneficiaries of price volatility in the market. Understanding market volatility helps investors make good investment positions. In the short-term, prices tend to fl...