The stabilizing effect of volatility in financial markets

Abstract

In financial markets, greater volatility is usually considered synonym of greater risk and instability. However, large market downturns and upturns are often preceded by long periods where price returns exhibit only small fluctuations. To investigate this surprising feature, here we propose using the mean first hitting time, i.e. the average time a stock return takes to undergo for the first time a large negative or positive variation, as an indicator of price stability, and relate this to a standard measure of volatility. In an empirical analysis of daily returns for $1071$ stocks traded in the New York Stock Exchange, we find that this measure of stability displays nonmonotonic behavior, with a maximum, as a function of volatility. Also, we show that the statistical properties of the empirical data can be reproduced by a nonlinear Heston model. This analysis implies that, contrary to conventional wisdom, not only high, but also low volatility values can be associated with higher instability in financial markets.

Main article (6 pages, 3 figures) and supplemental material as an ancillary PDF file (4 pages, 3 figures). Submitted to Phys. Rev. Lett

References in corpus (10)

• Cross-correlations between volume change and price change
• Economics need a scientific revolution
• Pathways towards instability in financial networks
• Switching times in long-overlap Josephson junctions subject to thermal fluctuations and non-Gaussian noise sources
• Hitting Time Distributions in Financial Markets
• Mean Escape Time in a System with Stochastic Volatility
• Indication of multiscaling in the volatility return intervals of stock markets
• The escape problem under stochastic volatility: the Heston model
• Metastability, nucleation, and noise-enhanced stabilization out of equilibrium
• A Structural Model for Fluctuations in Financial Markets

Cited by in corpus (13)

• Income inequality and mobility in geometric Brownian motion with stochastic resetting: theoretical results and empirical evidence of non-ergodicity
• Association between COVID-19 cases and international equity indices
• Methods for forecasting the effect of exogenous risk on stock markets
• Semi-metric portfolio optimization: a new algorithm reducing simultaneous asset shocks
• Enhancement of stability of metastable states in the presence of Lévy noise
• Dynamical stability of the weakly nonharmonic propeller-shaped planar Brownian rotator
• Axion field influence on Josephson junction quasipotential
• Predicting one type of technological motion? A nonlinear map to study the 'sailing-ship' effect
• Exactly solvable diffusions from space-time transformations
• CIR bridge for modeling of fish migration on sub-hourly scale
• Quantum Bohmian Inspired Potential to Model Non-Gaussian Events and the Application in Financial Markets
• Dynamics of kink train solutions in deformed Multiple sine-Gordon models
• New volatility evolution model after extreme events