The volatility of equity markets in recent months has sapped the confidence of investors but it has been a boon for some exchanges.
This both increases the volatility of equity returns and transfers value from debt to equity in the presence of default risks but has little to do with the Modigliani-Miller theorem in which default risk plays no part.
Late Friday, the SEC said in a statement that "exceptional trading volume and price volatility of the equity market over the last few days raise the potential of even greater challenges" during NMS' phase-in.
This stagnation in housing may be an important indicator in itself, forecasting a continued lack of direction and increased volatility like we have seen since the beginning of the year in the equity markets.
When John Valentine, a financial planner in San Ramon, Calif. who charges a fixed percentage of equity assets, analyzed his clients' returns and volatility over 18 months, those with 24 or fewer securities had a 5% higher risk-adjusted return compared with those owning 35 or more securities.
This defensive move was shown to be prudent as volatility erupted and considerable downside was experienced in equity markets in the first week of August, as shown in Figure 2.
Sure, there are the occasional bumps in the road (volatility), but owning an equity is nothing more than owning a small percentage of a business.
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Today high-freq shops are responsible for some 50% of equity trades (down from 60% in 2009, as market volatility has ebbed) and a growing percentage of derivatives, such as futures and options.
His investment team came into the year with a cautious stance on the equity market, given the strong gains of 2012 and the likelihood of volatility from the debt crisis in Europe and wrangling in Washington over the federal budget.
In fact, emerging market sovereign bonds have produced equity-like returns at times in the past (with commensurately high volatility, of course).
Global equity markets have sold off, volatility has spiked, and investors are questioning the sustainability of debt that was once considered rock solid.
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Or, said slightly differently, historically the role of fixed income in an individual's portfolio has been to offset the volatility inherent in having equity exposure.
Given their positive correlations with stocks and extreme cheapness, post-crisis, many of these types of bonds have simply been a lower-beta, lower-volatility way to access the strong equity market returns since 2009.
It's a tribute to the proliferation of hedge funds in the last two years and to the relatively low-volatility, sideways-moving equity markets that have put a serious crimp in investing strategies.
With a basket spread widely around the globe, Brinson argues, you can get equity-like returns with the low volatility you would expect from a balanced portfolio (a mixture of stocks and bonds).
The cost of insuring against bad outcomes in equity markets, at least as measured by the Chicago Board Options Exchange's VIX index of volatility, has been rising in recent days.
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