A look at the volatility of the market from a historical perspective. This gives us a view of understanding market sentiment historically.
In the last couple of decades, the US market has witnessed a technology bubble, a housing bubble, recession, and market crashes. I wanted to understand the human sentiment, the fear when market crashes, the euphoria while riding the upside of the bubble. Here I narrate the story of wall-street from the view of short-term volatility.
Volatility is a finance jargon for quantifying uncertainty over a window of time. If the window is small (like a week), then one can get a view of the market's reaction to day-to-day occurrences. On the other hand if we measure volatility using a larger window (such as a year), then a lot of the day-to-day noise dies out, and you get a macroscopic view of the market.
I wanted to understand how the market reacts to the crashes, and recessions. Do these things just happen out of the blue? Is there a lot of uncertainty, fear or excitement leading up to a market collapse? Is there a way to compare the latest market crash with those that have come before?
The picture above shows the S&P 500 index at the top, and its short-term volatility over the last 33 years. The last 33 years have gone through 4 recessions, the regions shaded in green. Here are some interesting observations:
I use S&P 500 to be representative of the stock market. The short term volatility is calculated by computing volatility using daily returns over a 45 day window.