The volatility of financials fluctuates daily in all aspects of today’s markets
Reply with 150 words each reply…
1= Michael Brown…
The volatility of financials fluctuates daily in all aspects of today’s markets. The volatile outcome, whether it be increasing or decreasing, can be good or bad. Suppose someone is looking to spend or sell; volatility plays a significant role in finding the best option for financial gain. If a person wanted to buy a home, they would desire volatility to be different than it is in today’s inflated housing market. Now, if that same person were looking to sell their home in this market, there would be a solid return unless you had to look for a home after the sale. Volatility plays the same role in the stock market and global exchange rates.
A recent article states, “Forecasting the volatility of financial asset returns is an important issue in the context of risk management, portfolio construction, and derivative pricing” (Clements et al., 2020). Forecasting volatility takes time because it is typically done over time to show a percentage of rising or fall. An example would be looking at an aggressive 401k portfolio daily. It could be seen making sharp declines and inclines weekly, but if watching the progression over a yearly graph, it can be seen as a steady decline or incline to give an idea if adjustments need to be made. The same goes for global exchange rates. Our text mentions, “The larger the degree of uncertainty of behavior for a certain currency, the higher the risk of dealing with this currency and operating business in the currency’s country of origin” (Satterlee, 2018). Depending on currency fluctuation in countries, volatility opens up the opportunity for increases or decreases in imports and exports. Volatility is unconsciously looked at daily in all aspects of life because humans constantly search for the easiest or wisest ways to succeed. What are some ways you look at the volatility in decision-making?
References
Clements, A., Liao, Y., & Yusui, T. (2021, May 28). Moving beyond Volatility Index (VIX): HARnessing the term structure of implied volatility. Journal of Forecasting. Volume 41 Issue 1 (Pages 86-99) Moving beyond Volatility Index (VIX): HARnessing the term structure of implied volatility – Clements – 2022 – Journal of Forecasting – Wiley Online Library (liberty.edu)
Oxford (2022), Oxford University Press volatility noun – Oxford Advanced Learner’s Dictionary at OxfordLearnersDictionaries.com (Links to an external site.)
Satterlee, B. C., (2018), International Business with a Biblical Worldview. (Page 144) Foreign Exchange Markets (mheducation.com) (Links to an external site.)
2 =Stephen G…
Definition:
Arbitrage: “Buying a [stock] in one market at a low price and reselling moments later in another market at a higher price” (Satterlee, Pg.139. 2018)
Summary:
In the article “Do ETFs increase Volatility?” Ithzhak Ben-David and his associates discuss the possibility that ETF’s are actually increasing market volatility for the stocks in their portfolio. This would come as a surprise as many investors view ETFs as a safe haven as they can offer “an unprecedented source of diversification at low cost and high liquidity” (Ben-David, Et al. 2018). However, the authors found that ETFs are fueling “a new breed of high-frequency investors, whose demand shocks can pass on to the underlying securities via the arbitrage activity continuously taking place between ETFs and their baskets” (Ben-David, Et al. 2018). Thus, these arbitrage traders are bringing volatility with them as they aggressively buy and sell as conditions change.
Discussion:
This is probably a new insight to ETF’s for many readers. However, the technique makes sense. When a fund manager bundles a certain stock into an ETF portfolio, then he has effectively created another market for that stock. Where there are multiple markets, there is the potential for arbitrage. Although, despite causing some volatility in the ETF market, is arbitrage a bad thing? To some “arbitrageurs’ activities are often viewed as essential for bringing prices in line with their fundamental value and creating efficient markets” (Kahraman. 2021). While others might argue that arbitrage is clearly taking advantage of the system with tools and technology that the average trader couldn’t possibly possess. Whatever is to be done about arbitrage is for government regulators to decide. However, if they are not very careful then the cure could be worse than the disease. Arbitrage can exist anywhere there are multiple markets, but reducing the available markets would come at a heavy cost to healthy competition.
References:
Satterlee, B. C. (2018). International Business: with Biblical Worldview. McGraw Hill Education.
Kahraman, Bige. (2021). Publicizing Arbitrage. Journal of Financial and Quantitative Analysis. Vol. 56, No. 3, Pg. 789-82. https://web-s-ebscohost-com.ezproxy.liberty.edu/ehost/pdfviewer/pdfviewer?vid=0&sid=72876eb7-7ced-4eea-8980-601fa780b7be%40redis
Ben-David, Et al (2018). Do ETF’s Increase Volatility? The Journal of Finance, Vol. 73, Iss. 6, Pg. 2471-2535. https://onlinelibrary-wiley-com.ezproxy.liberty.edu/doi/full/10.1111/jofi.12727
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