Sep

12

Volatility of stock returns has declined markedly after the onset of Iraq II in March 2003. The price stability of the current period has been compared to the mid 1990's, as well as the event horizon at the edge of a black hole (terra no can see ya'). How stable is it?

DJIA daily returns were partitioned into non-overlapping 500 trading day (about 2 year) segments counting back from today to 1931. The standard deviation (vol.) of each segment was calculated, as was respective mean daily return.

Without giving away the entire plot, the answer is "A lot lower". The current 500 day standard deviation ranked 10th lowest out of 39 such periods. (You will get to see Hilly after the upcoming classroom scene).

Over most periods, high volatility accompanies concurrent low returns. This relationship was confirmed by regressing each 500 day period's mean daily return against the same period's standard deviation:

The regression equation is: mean return = 0.000769 - 0.0515 sd

Predictor       Coef       SE Coef      T      P
Constant       0.0007687   0.0001712   4.49   0.000
sd            -0.05150     0.01507    -3.42   0.002

S = 0.000496235   R-Sq = 24.0%   R-Sq(adj) = 21.9%

Looking further at whether the prior 500 days' standard deviation predicts the current 500 days' mean return, as usual, came up empty (slope coefficient N.S.). So it would seem that from a long-term historical perspective, current low volatility portends neither doom nor boom.

As promised, here are the dates and standard deviations of the 500 day periods, ranked low to high. One also notes the high vol. periods near the bottom, mainly around the depression, 1988 (containing 10/87), the start of WWII, and our old friend 2002:

Date        StDev.            Date        StDev.
12/23/1964    0.0050          1/15/1971     0.0084
1/23/1953     0.0054          12/9/1980     0.0087
1/16/1945     0.0057          11/20/1984    0.0090
1/19/1955     0.0057          12/23/1976    0.0093
1/21/1969     0.0059          1/20/1937     0.0094
10/12/1994    0.0060          10/29/1990    0.0096
12/16/1966    0.0063          1/22/1947     0.0097
1/9/1973      0.0065          12/1/1982     0.0101
1/3/1961      0.0066          9/16/2004     0.0109
9/11/2006     0.0066          9/20/2000     0.0116
10/3/1996     0.0066          9/28/1998     0.0116
1/9/1959      0.0070          1/20/1941     0.0127
1/22/1951     0.0074          1/2/1975      0.0129
1/20/1949     0.0074          9/20/2002     0.0140
1/15/1957     0.0075          1/19/1939     0.0167
12/15/1978    0.0078          11/4/1988     0.0175
1/19/1943     0.0079          1/23/1935     0.0214
12/28/1962    0.0082          1/14/1931     0.0218
11/13/1986    0.0082          1/11/1933     0.0312
10/20/1992    0.0082

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