Financial market volatility: measurement, causes and consequences

During the 1980s and 1990s a number of countries have taken steps to facilitate domestic and cross-border trading in marketable financial instruments. During the same period there have been major advances in technology which, together with the development in financial techniques and hedging instruments, have significantly increased the integration of financial markets.

These changes have, undoubtedly, improved the global allocation of financial capital. However, there is also a perception that the volatility of financial asset prices has risen, or perhaps has failed to decline, as might have been expected in the more stable inflation environment compared with the early 1980s. If true, this would be surprising and raises important questions with regard to both the measurement of volatility and its causes, in particular the effects of such factors as deregulation, internationalisation of portfolio management, the use of new hedging instruments and macroeconomic policies. In turn, a possible rise in financial asset price volatility might have macro- and microeconomic consequences if there were to be effects on the allocation of financial resources and the stability of financial markets. Such implications might call for policy responses.

Against this background the BIS invited central bank economists to a conference held at the BIS on 20th and 21st November 1995 on the following topic "Financial market volatility: measurement, causes and consequences".

The presentation and discussion of the twenty-one contributions (sixteen from the participating central banks and five from the BIS staff) took place in three separate sessions. A fourth and final session was devoted to a general discussion of financial asset price volatility. The twentyone papers are reproduced in the following pages in the order in which they were presented, with certain features of each paper, including sample period, country and market coverage, empirical method used, etc., summarised in a subsequent profile. The remainder of this introduction provides a summary of each paper as well as of the general discussion which followed.