Have professional investors made markets more volatile?
I put together this chart for my column this week, but it was (correctly) deemed too confusing for Time readers. On the assumption that readers of this blog are a hardier breed, here it is:
The idea was to investigate whether stock market volatility had risen or fallen as professional investors (mutual funds, pension funds, etc.) took over from the part-timers who previously owned most shares. There is, as you can see, no clear trend. The late 1980s seem to have been a high point in volatility. Since then, the one thing I can see is an pretty clear distinction between years-long periods of low volatility and years-long periods of high volatility. I wonder if this might have something to with the rise of more quantitative, "risk-controlled" investing styles that deliver steady and seemingly uncorrelated returns in good times but, as MIT's Andy Lo has demonstrated, tend to wig out all at the same time. In any case, as I've written before, it looks like we're at the beginning of one of those high-volatility eras.
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1
Justin
The use of a monthly percent change may not measure volatility. As an example, if the market were to move gradually upwards at a rate of 1 percent per day for a month, it would show up on your method as more volatile than a market that went up one day 10 percent and down the next at at 11 for a month. The second is certainly more volatile.
I think a better test for volatility is the daily percent change in market value of all stocks. Sum the absolute value (ignore the negative sings) of those daily percent changes in value for the month and compare periods. The higher the change in summed daily changes, the higher the volatility of that period. -
2
Okay, I'll try that. But in this case my aim was to keep the chart as simple and comprehensible as possible, not devise the best measure of volatility. (That's what finance professors are for, isn't it?)
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3
In my experience it is the rare professional mutual fund manager who can beat the SNP 500 index and do it consistently. So I tend to agree that the professionals may not be any better at handling volatility. When you see someone beating the market consistently it is almost certain that he has found some underhanded gimmick that may not be strictly legal and is certainly borderline behaviour. I'd like to have someone prove me wrong, however.
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