A measure of fluctuation in the price movement of an asset (usually, a tradable asset such as a stock) over a period of time. Volatility is an important ingredient in the theoretical valuation of an option price (premium). In other words, it captures uncertainty about future stock price movements or the returns provided by the stock.
Mathematically, it is the standard deviation of the stock return in one year assuming the return is expressed using continuous compounding. Stocks, typically, have a volatility in the range of 15%-60% on average. However, in the wake of Lehman Brothers’ collapse in September 2008, volatility in financial markets spiked dramatically. The volatility of the S&P 500 index hit 21.5% at the beginning of the year. However, it climbed to 79% by early December 2008, and by April 2009 it cooled off to 43%. In the United States, the CBOE volatility index is a barometer of investors’ fear. It is Wall Street’s favorite for the measurement of investors’ reluctance to risk their money.
Comments