Is volatility good for the stock market?
A look at growth of volatility in the stock market since the 2008 financial crisis.
Since the 2008 financial crisis, the volatility of the world stock market has increased. Mature markets such as the U.S. stock market experienced relatively small volatility; despite a few adjustments, the U.S. Dow Jones Industrial Average has been rising slowly for more than a decade. In comparison, emerging markets experience changes more regularly, and are thus more volatile.
Take China as an example. Under the impact of the financial crisis around 2008, the international capital flow has accelerated, changing the operating conditions of stock markets and listed companies. The accelerated circulation of international capital has prompted the emerging capital market in China to expand rapidly since 2008.
The expansion of the market and the sharp rise in trading volume have attracted an increasing number of domestic and foreign investors to enter the stock market.
As a result, the stock market fluctuates more due to the increase in market scale. In addition, China’s stock market has always been greatly affected by government policies. During the financial crisis around 2008, the financial situation in China was also affected. However, the Chinese government overestimated the impact and was too cautious. In order to resist the influence of the financial crisis, it launched a number of market rescue measures which took almost four trillion RMB. This exacerbated the shock and fluctuation of the market and even deformed its self-correction mechanism.
From a larger perspective, in more than ten years prior to 2008, the world was relatively peaceful and countries across the world cooperated closely to promote the development of each other. However, after 2008 the international situation became more complex along with frequent territorial and trade disputes. The COVID epidemic and the recent Russia-Ukraine war have also increased the volatility of the market.
Additionally, emerging investment tools such as financial technology and quantitative trading are more and more deeply integrated into the stock market which also adds to the market’s volatility. Overall, since 2008 financial and international events and advancements in technology combined have led to an increasing effect on the volatility of the world stock market.