Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in)

15 Major Factors Influencing Stock Market Volatility

4 min read

Market volatility refers to the level of fluctuation in the prices of securities, such as stocks, bonds, and commodities, in a given market. It is a measure of the amount that the price of an asset changes over a certain period of time. High market volatility indicates that the price of an asset can fluctuate significantly over a short period of time, while low market volatility indicates that the price of an asset is more stable.

Here are 15 factors that can influence market volatility:

Economic news and data: Changes in economic conditions, such as interest rates, employment, and GDP, can all affect market volatility. For example, in the US in 2008, the collapse of the housing market and the subsequent financial crisis led to a sharp increase in market volatility as investors became concerned about the state of the economy.

Political events: Political developments, such as elections, regulatory changes, and geopolitical tensions, can also impact market volatility. For example, in 2016, the Brexit vote in the UK led to increased market volatility as investors were uncertain about the economic implications of the UK’s decision to leave the European Union.

Market sentiment: Market sentiment, or the overall mood of market participants, can influence market volatility. If there is widespread optimism or pessimism about the market, it can lead to increased volatility. For example, during the dot-com bubble in the late 1990s, there was widespread optimism about the future of technology companies, which led to increased demand for tech stocks and increased market volatility.

Market manipulation: Market manipulation, such as insider trading or wash trading, can artificially inflate or deflate prices and increase market volatility. For example, in the US in 2001, the Enron scandal, in which the company was found to have engaged in accounting fraud, led to a decline in the company’s stock price and increased market volatility.

Natural disasters: Natural disasters, such as earthquakes, hurricanes, and floods, can disrupt markets and increase volatility. For example, in the US in 2005, Hurricane Katrina led to a disruption of oil production in the Gulf of Mexico and a spike in oil prices, which contributed to increased market volatility.

Changes in supply and demand: Changes in the supply and demand for a particular asset can also affect its price and market volatility. For example, in the European stock market in the 1980s, the privatization of state-owned enterprises led to increased demand for these newly-listed companies, which contributed to increased market volatility.

Pandemic: A pandemic, such as the COVID-19 pandemic, can disrupt global supply chains, slow economic activity, and lead to widespread market uncertainty, which can increase market volatility. For example, in 2020, the COVID-19 pandemic led to increased market volatility as investors were uncertain about the economic impact of the pandemic.

Economic crises: Economic crises, such as recessions or financial market collapses, can lead to increased market volatility as investors may become more risk-averse and sell off their assets. For example, in the European debt crisis in 2011 led to increased market volatility as investors sold off their assets in response to the crisis. It was primarily caused by the sovereign debt crisis in several European countries, including Greece, Ireland, Italy, Portugal, and Spain, as well as the banking crisis in some of these countries.

War: War can lead to market uncertainty and disrupt global economic activity, which can increase market volatility. For example, in the US stock market in 2003, the invasion of Iraq led to increased market volatility as investors were concerned about the economic implications of the war.

Central bank policy decisions: Central bank’s policy decisions, such as changes to interest rates or the implementation of quantitative easing, can also affect market volatility. These decisions can impact the supply and demand for certain assets and influence market sentiment, which can in turn lead to changes in market volatility. For example, in the US in 2015, the Federal Reserve’s decision to raise interest rates for the first time in almost a decade led to increased market volatility as investors were uncertain about the impact on the economy.

Government policy decisions: Government policy decisions, such as changes to tax rates or regulatory policies, can also impact market volatility. These decisions can affect the economic environment and the prospects for different industries, which can influence the demand for certain assets and lead to changes in market volatility. For example, in the Indian stock market in 2017, the government’s demonetization policy, which removed certain high-denomination notes from circulation, led to increased market volatility as investors were uncertain about the economic impact of the policy.

Yield curve inversion: Yield curve inversion refers to a situation where the yields on short-term bonds are higher than those on long-term bonds. This can occur when investors are concerned about the outlook for the economy and are willing to accept lower returns on long-term investments in exchange for the perceived safety of shorter-term investments. Yield curve inversion can be a signal of an impending recession and can lead to increased market volatility as investors become more risk-averse. For example, in the US in 2019, the yield curve inverted, leading to increased market volatility as investors were concerned about the possibility of a recession.

Scams: Scams, such as fraudulent investment schemes or insider trading, can also lead to increased market volatility. These types of activities can erode investor trust and confidence in the market, leading to increased selling pressure and higher market volatility. For example, in the European stock market in 2002, the revelation of accounting irregularities at Parmalat, an Italian dairy company, led to a decline in the company’s stock price and increased market volatility as investors reacted to the news of the fraud.

Terrorist attacks: Terrorist attacks can also disrupt markets and increase volatility. These types of events can create uncertainty and lead to a decline in investor confidence, which can result in increased selling pressure and higher market volatility. For example, in the US in 2001, the terrorist attacks on September 11th led to a decline in stock prices and increased market volatility as investors reacted to the events.

Currency Crisis: A currency crisis occurs when there is a sharp decline in the value of a country’s currency, often due to economic or political instability. This can lead to increased uncertainty and risk for investors, as they may become concerned about the stability of the country’s economy and the value of their investments. This can lead to increased selling pressure on stocks and other assets, resulting in higher market volatility. For example, in 1997, the Asian financial crisis, which was triggered by a currency crisis in Thailand, had a significant impact on stock markets in the region. As investors became concerned about the stability of the Thai baht and the broader Asian economy, there was increased selling pressure on stocks, leading to a sharp decline in stock prices and increased market volatility.

Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in)

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