Inside Investment: The strange case of volatility
There are sound reasons why volatility has fallen across asset classes. But a safe bet for 2007 is that it will rise again.
Once upon a time, trading floors had a brash charm. On days like sterling’s exit from the European Exchange Rate Mechanism there was no better place to watch the drama of markets unfolding. No more. The latter-day trading floor is more sepulchral than theatrical. Within these (quiet please) cathedrals to Mammon, traders in smaller and smaller silos buy and sell ever more niche products silently, over electronic networks. They scarcely pass the time of day with their colleagues on other desks, let alone hoot ’n’ holler at them.
The leeching of colour from the trading floors of London and New York is also a reflection of markets. They are boring; almost excruciatingly so. The US equity market is behaving as if it were suffering from an extended narcoleptic episode. A report last month by US research firm Birinyi Associates said that the Dow Jones Industrial Average had not suffered a drop of 2% or more since May 19 2003. This is an interlude of tranquillity unmatched since 1900.
The Vix Index of US stock market volatility went down in 2006 as the Dow Jones, slowly, predictably and smoothly, went up.