The Recent Behaviour of Financial Market Volatility

48 Pages Posted: 17 Sep 2007

See all articles by Fabio Panetta

Fabio Panetta

Bank of Italy

Paolo Angelini

Bank of Italy

Giuseppe Grande

Bank of Italy

Aviram Levy

Bank of Italy

Roberto Perli

Federal Reserve Board - Monetary Affairs

Pinar Yesin

Swiss National Bank

Stefan Gerlach

Central Bank of Ireland; Centre for Economic Policy Research (CEPR)

Srichander Ramaswamy

Bank for International Settlements (BIS)

Michela Scatigna

Bank for International Settlements (BIS)

Date Written: August 2006

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.

Keywords: financial volatility, risk taking, international financial markets

JEL Classification: G10, G11, G20

Suggested Citation

Panetta, Fabio and Angelini, Paolo and Grande, Giuseppe and Levy, Aviram and Perli, Roberto and Yeşin, Pınar and Gerlach, Stefan and Ramaswamy, Srichander and Scatigna, Michela, The Recent Behaviour of Financial Market Volatility (August 2006). Bank of Italy Occasional Paper No. 2, Available at SSRN: https://ssrn.com/abstract=1014547 or http://dx.doi.org/10.2139/ssrn.1014547

Fabio Panetta (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy
+39 06 4792 4143 (Phone)
+39 06 4792 3723 (Fax)

Paolo Angelini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giuseppe Grande

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+390647922643 (Phone)
+390647923723 (Fax)

Aviram Levy

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Roberto Perli

Federal Reserve Board - Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2465 (Phone)
202-452-2301 (Fax)

Pınar Yeşin

Swiss National Bank ( email )

Boersenstrasse 15, P.O.Box
Zurich, CH-8022
Switzerland
41-58-631-3969 (Phone)

HOME PAGE: http://www.pinaryesin.com

Stefan Gerlach

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Srichander Ramaswamy

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Michela Scatigna

Bank for International Settlements (BIS) ( email )

Basel, 4002
Switzerland

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