Increasing Volatility, Increasing Downside Risk

Since 2015, the 90-day historical volatility has been increasing for both Strait Times Index (STI) and FTSE Bursa Malaysia KL Composite Index (FBMKLCI). Based on past index / volatility trends, increasing volatility generally led to negative movements in the indices

Background of volatility

When the stock market goes up one day, and then goes down for the next five, then up again, and then down again, that’s what you call stock market volatility. Seasoned traders who monitor the markets closely usually buy stocks and index options when the VIX is high. When the VIX is low, it usually indicates that investors believe the market will head higher. This, in turn, can trigger a market selloff, as speculators try to unload their holdings at premium prices.

http://www.commonwealth.com/RepSiteContent/stock_volatility.htm

Historical Volatility – STI

Historical volatility of STI indicates the following:

  • Lower volatility period (e.g 2003 – 2006, end 2009 – 2015 excl. 2011-2012) will lead to positive movements in the STI
  • Upward spikes in volatility usually led to negative movements in the index (e.g 2008 – 2009, 2011-2012)
  • Recent 90-day volatility is increasing and is currently stands at 16.7%, approaching the long term average 90-day volatility of 18.0%. If volatility increases above the long term average, there is a possibility that the decline in STI will continue (potentially at a faster pace)

Slide1

Historical Volatility – FBMKLCI

Historical volatility of FBMKLCI indicates the following:

  • Similar patterns to that of STI
  • Lower volatility period (e.g 2002 – 2006, end 2009 – 2015 excl. 2011-2012) will lead to positive movements in the STI
  • Upward spikes in volatility usually led to negative movements in the index (e.g 2008 – 2009, 2011-2012)
  • Recent 90-day volatility has increased and is currently at 11.48%, approaching the long term average 90-day volatility of 15.17%. Unlike STI, it appears that the recent volatility for FBMKLCI may trend lower & further from the 15.17% mark, signaling the possibility of FBMKLCI rebounding.

Slide2Key Implications

  • Recent developments in global markets will continue to drive up the volatility for both STI and FBMKLCI
  • If compared to STI, FBMKLCI’s volatility appears to be relatively lower than of STI
  • Investment entry should coincide with periods of lower volatility

 

DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION.  SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.

Author: Ken Utau

Markets Observer + Food Lover

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