Volatility? What Volatility?

While most would agree that the stock market has certainly been more volatile this year, putting it in perspective with the long term trend shows that by at least one measure, the S&P 500 was less volatile this year than its long term average.

The chart below summarizes the average absolute daily price change in the S&P 500 by year.  In 2007, the average worked out to 72 basis points, which means that, on average, the S&P 500 had a daily move (up or down) of 0.72% versus an average of 0.75% since 1928.  While this year was more volatile than the last three years, prior to those years, the last time the market was this 'placid' was in 1996.

Comments

[Greg Feirman]

Hmmmm.... but the VIX was LOW in the first half of the year but HIGH in the second half of the year when it spiked.

What does the volatility of the 2nd half look like compared to history? That might look a little different.

[Bill Luby]

Just curious, could you elaborate on what you used as a proxy for the "S&P 500" from 1928 to 1957, before the S&P 500 was officially established?

Thanks,

-Bill

[Paul Hickey]

Bill,

For data prior to the 1950s we use the S&P 90 index. Wikipedia actually has a pretty accurate description of the history of the index, so rather than retype it all, you can see it at the following link:
http://en.wikipedia.org/wiki/S&P_500

[Costas Katsileros]

Do estimate the absolute daily change from the previous close? I think that the intraday range would be more representative, as we had a lot of days that we went from say -1% to +1%.

[Brian Jacobs]

Looks pretty high if you look at the data post-depression era (seems to have brought up the average significantly).

[Ottnott]

"the last time the market was this 'placid' was in 1996."

What graphic are you looking at?

The one in the post tells us this: volatility returned to its long-term average in 2007 after 3 years of well-below-average volatility.

I see no value in a comparison to 1996.

[Paul]

Ottnott,
The whole sentence was:

"While this year was more volatile than the last three years, prior to those years, the last time the market was this 'placid' was in 1996."

So besides the last three years the last time the market was this placid (or un-volatile) was in 1996. Sorry for any confusion.

Paul

[Antoin]

That volatility statistic is misleading, we had the lowest volatility every in the first half of '07. the Vix broke below 10 in Dec/Jan of last year, after aug. the vix was much higher.
Last year was a tale of two markets.

[kio]

I am afraid that there is some misunderstanding of the term "volatility". One should differ random fluctuations associated with volatility and trends.
According to your (borrowed) definition volatility of 1% (p.p.) would be measured if an 1% positive return would be observed for every day of a year, i.e. total linear growth would be around 220%. Obviously, according to the accepted definition, one should consider than deterministic trend as a year of high volatility. I would disagree.
Detrending must be the first step in volatility estimates, RMS or ATR.
Then one can find that the years of high volatility since 1990 were associated with strong trends – positive before 2000 and negative one after 2001.
Actually, 2007 has very high volatility because of very weak trend – around 7% annual return.

[Retirement Investment Advisor]

It is only natural that as the market matures, volatility tends to reduce.