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The recent behaviour of financial market volatility

Fabio Panetta (), Paolo Angelini (), Giuseppe Grande, Aviram Levy (), Roberto Perli, Pinar Ayse Yesin (), Stefan Gerlach (), Srichander Ramaswamy () and Michela Scatigna ()
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Fabio Panetta: Banca d'Italia
Aviram Levy: Banca d'Italia
Srichander Ramaswamy: Bank for International Settlements
Michela Scatigna: Bank for International Settlements

No 2, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: A striking feature of financial market behaviour in recent years has been the low level of price volatility over a wide range of financial assets and markets. The issue has attracted the attention of central bankers and financial regulators due to the potential implications for financial stability. This paper makes an effort to shed light on this phenomenon, drawing on literature surveys, reviews of previous analyses by non-academic commentators and institutions, and some new empirical evidence. The paper consists of seven sections. Section 2 documents the current low level of volatility, putting it into a historical perspective. Section 3 briefly reviews the theoretical determinants of volatility, with the aim of helping the reader through the subsequent sections of this Report, which are devoted to the explanations of the phenomenon under study. These explanations have been grouped into four categories: real factors; financial factors; shocks; and monetary policy. Thus, Section 4 looks into the relation between volatility and real factors, from both a macro- and a microeconomic perspective. Section 5 considers how the recent developments in financial innovation and improvements in risk management techniques might have contributed to the decline in volatility. Section 6 considers the relation between real and financial shocks and volatility. Finally, Section 7 explores whether more systematic and transparent monetary policies might have led to lower asset price volatility.

Keywords: financial volatility; risk taking; international financial markets (search for similar items in EconPapers)
JEL-codes: G10 G11 G20 (search for similar items in EconPapers)
Date: 2006-08
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