The stabilizing effect of volatility in financial markets

Davide Valenti, Giorgio Fazio and Bernardo Spagnolo

Papers from arXiv.org

Abstract: In financial markets, greater volatility is usually considered synonym of greater risk and instability. However, large market downturns and upturns are often preceded by long periods where price returns exhibit only small fluctuations. To investigate this surprising feature, here we propose using the mean first hitting time, i.e. the average time a stock return takes to undergo for the first time a large negative or positive variation, as an indicator of price stability, and relate this to a standard measure of volatility. In an empirical analysis of daily returns for $1071$ stocks traded in the New York Stock Exchange, we find that this measure of stability displays nonmonotonic behavior, with a maximum, as a function of volatility. Also, we show that the statistical properties of the empirical data can be reproduced by a nonlinear Heston model. This analysis implies that, contrary to conventional wisdom, not only high, but also low volatility values can be associated with higher instability in financial markets.

Date: 2017-08
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Published in Phys. Rev. E 97, 062307 (2018)

Downloads: (external link)
http://arxiv.org/pdf/1708.08695 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1708.08695

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators (help@arxiv.org).