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The recent behaviour of financial market volatility


  • 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)


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.

Suggested Citation

  • Fabio Panetta & Paolo Angelini & Giuseppe Grande & Aviram Levy & Roberto Perli & Pinar Yesin & Stefan Gerlach & Srichander Ramaswamy & Michela Scatigna, 2006. "The recent behaviour of financial market volatility," Questioni di Economia e Finanza (Occasional Papers) 2, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_2_06

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    References listed on IDEAS

    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. 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.
    3. Bekaert, Geert & Engstrom, Eric & Xing, Yuhang, 2009. "Risk, uncertainty, and asset prices," Journal of Financial Economics, Elsevier, vol. 91(1), pages 59-82, January.
    4. Shaghil Ahmed & Andrew Levin & Beth Anne Wilson, 2004. "Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 824-832, August.
    5. 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. 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.
    2. Fischer, Andreas M. & Ranaldo, Angelo, 2011. "Does FOMC news increase global FX trading?," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2965-2973, November.
    3. Watkins, Clinton & McAleer, Michael, 2008. "How has volatility in metals markets changed?," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 78(2), pages 237-249.
    4. Cano Berlanga, Sebastian & Giménez Gómez, José M. (José Manuel), 2016. "On Chinese stock markets: How have they evolved along time?," Working Papers 2072/267085, Universitat Rovira i Virgili, Department of Economics.
    5. 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.
    6. Stefan Gerlach & Mathias Hoffmann, 2008. "The Impact of the Euro on International Stability and Volatility," European Economy - Economic Papers 2008 - 2015 309, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. repec:spr:annopr:v:266:y:2018:i:1:d:10.1007_s10479-017-2602-4 is not listed on IDEAS
    8. Nabil Maghrebi & Mark J. Holmes & Kosuke Oya, 2014. "Financial instability and the short-term dynamics of volatility expectations," Applied Financial Economics, Taylor & Francis Journals, vol. 24(6), pages 377-395, March.

    More about this item


    financial volatility; risk taking; international financial markets;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General


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