Volatility is the up-and-down movement of the market. It is usually measured by the standard deviation from the expectation. If you look at a day,the movement is typically up, but not by very much. Any movement up or down from its expectation is volatility.

The volatility of the stock market is roughly 20% a year and 5.8% a month,but volatility keeps on  changing, so we go through periods of high volatility and low volatility. The biggest driver of volatility is a drop in the market. There are simple leverage reasons why market drops cause volatility. But beyond that simple mechanism, following a drop in the market, volatility typically shoots way up for a time before it dampens down again.

We had an almost 50% drop from top to bottom in the financial crisis.Then the markets came up almost 100% which brought us back to where we started.We got hit again with another really sharp decline in the third quarter of this year.Now we're recovering from that.What we are seeing is the leftovers from the financial crisis.The crisis started with the poor quality of mortgages and the fact that they were defaulting.Now it's moving to sovereign debt in Europe.The general tendency is to return to normal levels.This volatility is not going to be permanent, but it may last awhile.

Required:

(a) Elaborate the undesirable consequences of stock market volatility.                        

(b) (i) Assess the  salient  features of  the  2007 financial crisis.                                       

(ii) Elaborate  how  regulations  can  help  to curb the repeat of the crisis.  

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a Undesirable Consequences of Stock Market Volatility Investor Anxiety and Losses Volatility in the stock market can cause investor anxiety and result in significant losses Sharp declines in stock pri... View the full answer