At ESCP Europe, management is taught from an interdisciplinary perspective at the highest level of academic excellence, developing culturally intelligence.
I believe that any kind of learning starts with an interest. In order to follow up with it, it is essential to keep up with the industry. That’s why, our team is delighted to sum up and give relevance to some news in this paper.
Key fact: Weekly volatility
I like to start every argument by first giving some definitions.
Volatility can be defined, as we studied it, as the measure of the dispersion of returns for a given security or market index. It can either be measured by using the standard deviation or variance between returns from that same security or market index. Consequently, the higher the volatility the riskier the security.
In other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short period of time in either direction.
Here comes the issue of this second week of February of 2018: The end of an era for market tranquility as Nicole Bullock, Eric Platt and Alexandra Scaggs called it on the Financial Times. For more than a decade, lots of traders made their living out of the volatility of the US stock market. Unfortunately (?), the current era of peace after 2014 pushed them back to work.
Most of all, the breaking news of last Friday that announced the strong increase in wages coming from the US government employment report, causing bond yields to increase and the price of those bonds to go down. Later on, the Treasury market had experienced $14tn of losses, defining this as the worst week for Wall Street in the past two years. The volatility that could have been analyzed on a daily basis over the past week has attracted the attention of those expert traders above mentioned. Since the beginning of the financial crisis, markets have been boosted by an unexpected mixture of ultra and low interest rates and asset and characterized central banks’ buying strategy to defend themselves from deflation. The rate of inflation that workers, businesses and investors think will prevail in the future, and that they will therefore factor into their decision making seems to be symptom of positive expectations. Therefore, Central Banks are back at pulling from accommodative polices.
At the end, the question to ask to investors is whether it is correct to bet on the market volatility when it comes to adjusting to a different economic reality.
- Alessandra Damiani
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