Volatility

In economics, the term volatility is used to measure how much the price or value of an economic good or service changes over time. Goods or services where the price changes a lot are said to have a high volatility, those that don't have a low volatility. The word come from the Latin verb "volare" meaning "to fly".

In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a "volatile" market. An asset's volatility is a key factor when pricing options contracts. In statistical terms, volatility is the standard deviation of a market or security’s annualised returns over a given period - essentially the rate at which its price increases or decreases. Historical volatility is calculated using a series of past market prices, while implied volatility looks at expected future volatility, using the market price of a market-traded derivative like an option.

Causes of volatility

Market volatility is caused by a host of several factors

• Political and economic factors
• Industry and sector factors
• Company performance
• Volatility overseas