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The recent behaviour of financial market volatility

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Author Info

  • Fabio Panetta

    ()
    (Banca d'Italia)

  • Paolo Angelini

    ()
    (Banca d'Italia)

  • Giuseppe Grande

    ()
    (Banca d'Italia)

  • Aviram Levy

    ()
    (Banca d'Italia)

  • Roberto Perli

    ()
    (Federal Reserve Board)

  • Pinar Yesin

    ()
    (Swiss National Bank)

  • Stefan Gerlach

    ()
    (Bank for International Settlements)

  • Srichander Ramaswamy

    ()
    (Bank for International Settlements)

  • Michela Scatigna

    ()
    (Bank for International Settlements)

Abstract

A striking feature of financial market behaviour in recent years has been the low level of price volatility over a wide range of financial assets and markets. The issue has attracted the attention of central bankers and financial regulators due to the potential implications for financial stability. This paper makes an effort to shed light on this phenomenon, drawing on literature surveys, reviews of previous analyses by non-academic commentators and institutions, and some new empirical evidence. The paper consists of seven sections. Section 2 documents the current low level of volatility, putting it into a historical perspective. Section 3 briefly reviews the theoretical determinants of volatility, with the aim of helping the reader through the subsequent sections of this Report, which are devoted to the explanations of the phenomenon under study. These explanations have been grouped into four categories: real factors; financial factors; shocks; and monetary policy. Thus, Section 4 looks into the relation between volatility and real factors, from both a macro- and a microeconomic perspective. Section 5 considers how the recent developments in financial innovation and improvements in risk management techniques might have contributed to the decline in volatility. Section 6 considers the relation between real and financial shocks and volatility. Finally, Section 7 explores whether more systematic and transparent monetary policies might have led to lower asset price volatility.

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File URL: http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/qef2/occasional_paper_2.pdf
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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 2.

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Date of creation: Aug 2006
Date of revision:
Handle: RePEc:bdi:opques:qef_2_06

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Web page: http://www.bancaditalia.it
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Related research

Keywords: financial volatility; risk taking; international financial markets;

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References

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  1. Dynan, Karen E. & Elmendorf, Douglas W. & Sichel, Daniel E., 2006. "Can financial innovation help to explain the reduced volatility of economic activity?," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 123-150, January.
  2. Bekaert, Geert & Engstrom, Eric & Xing, Yuhang, 2006. "Risk, Uncertainty and Asset Prices," CEPR Discussion Papers 5947, C.E.P.R. Discussion Papers.
  3. Doron Avramov & Tarun Chordia & Amit Goyal, 2006. "The Impact of Trades on Daily Volatility," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1241-1277.
  4. Andreou, Elena & Osborn, Denise R & Sensier, Marianne, 2000. "A Comparison of the Statistical Properties of Financial Variables in the USA, UK and Germany over the Business Cycle," Manchester School, University of Manchester, vol. 68(4), pages 396-418, Special I.
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Cited by:
  1. Andreas M. Fischer & Angelo Ranaldo, 2008. "Does FOMC News Increase Global FX Trading?," Working Papers 2008-09, Swiss National Bank.
  2. Choi, Kyongwook & Hammoudeh, Shawkat, 2010. "Volatility behavior of oil, industrial commodity and stock markets in a regime-switching environment," Energy Policy, Elsevier, vol. 38(8), pages 4388-4399, August.
  3. Stefan Gerlach & Mathias Hoffmann, 2008. "The Impact of the Euro on International Stability and Volatility," European Economy - Economic Papers 309, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  4. Nicholas Apergis & Christina Christou & James E. Payne, 2014. "Precious metal markets, stock markets and the macroeconomic environment: a FAVAR model approach," Applied Financial Economics, Taylor & Francis Journals, vol. 24(10), pages 691-703, May.

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