Dossier Trade

Risk ratio volatility - What investors need to consider

DAX Kurslinie

Pandemic, US elections, economic concerns are breeding grounds for volatility in the securities markets. In the case of major events and surprises, when expectations about direction diverge widely, things can get rough.

What is volatility?

Volatility measures the intensity of the fluctuations of a security price or an index around its own mean value.

The higher the volatility, the greater the deviation, for example, of the share price from its mean value. While historical volatility refers to past volatility, implied volatility measures expected future volatility.

How does volatility arise?

In addition to long-term price trends, volatility arises through selective effects. The main drivers are changes in the opinions of traders, investors and investors. All players react to uncertainties such as the events mentioned above or unexpected events in accordance with their own expectations, trade directly or adjust price targets and limits.

What does volatility mean?

Volatility is considered a risk indicator. It brings uncertainty for some, but opportunities for others.

For the German savings mentality in particular, volatility is a measure of risk, the intolerance of which is regarded as one of the reasons for the local stock aversion. And professional investors react with hedges to higher price fluctuations. Volatility sets the market in motion. Professional traders need deviations for entry and exit. Only volatility offers short-term traders opportunities - in both directions.

How to measure volatility?

For historical volatility, the so-called standard deviation, the fluctuation of the real values around a calculated moving average, which can be represented as a curve or straight line, applies. Technical key figures are based on historical volatility.

Implicit volatility has now established itself in the market. It is based on the option prices on the futures market and reflects the expectations that prevail in the market. The expected price fluctuations for all major markets are shown in the form of indices. The VDAX-New, for example, reflects the implied volatility of DAX shares over a 30-day period, the VSTOXX for the Euro Stoxx 50 and the VIX for the S&P 500.

Volatility is expressed in percent. A value of the VDAX-New of 20 percent means, for example, that market participants expect fluctuations of 20 percent around the DAX average over the next four weeks.

What is normal, low or high volatility?

Which volatility is regarded as normal is a purely mathematical value and also depends strongly on the period invested. In recent years, the volatility of German equities has mostly been below 20 percent, but at the start of the stock market year 2019, the VDAX-New stood at 24 percent. Looking back a few decades, European stock markets show a typical volatility of 20 to 30 percent, US stock markets 15 to 25 percent.

© November 2020, Deutsche Börse AG

VDAX-NEW 2003–2018

VDAX-NEW Graph von 2003 bis 2018

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