University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
Apart from October 1987 and October 1989, volatility was not particularly high in the 1980s. Moreover, the growth in stock index futures and options trading has not been associated with an upward trend in stock volatility. There is little evidence that computerized trading per se increases volatility, except perhaps within the trading day.
On October 13, 1989, all major networks flashed reports on the market decline. The ability of investors and the press to track stock prices on a virtually continuous basis has heightened public perceptions of a volatility problem. What we do not know, because the intraday data on stock prices are simply unavailable, is whether the large but extremely brief price drops that have characterized recent market declines also occurred in the past, when daily and monthly volatility was higher than it is today.
The evidence so far is inconclusive as to whether trading halts or circuit-breakers can reduce volatility in a beneficial way. Even if circuit-breakers can reduce volatility, are the benefits of stability greater than the cost of inefficiency created by the trading halt?
Key words: Volatility, Crash, Circuit-breakers, Program trading
JEL Classifications: G14, G18
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© Copyright 1998-2017, G. William Schwert
Last Updated on 8/8/2017