Volatility: What’s causing it, and who’s profiting

Adriene Hill Aug 15, 2011

Volatility: What’s causing it, and who’s profiting

Adriene Hill Aug 15, 2011

STEVE CHIOTAKIS: In the past week, I’ve had to describe what the stock market was doing through all its ups and downs. You’ve just heard me say big swings, right? I also use the term ‘whipsaw,’ and ‘roller coaster.’ Here’s what it boils down to, though: the word volatility. And what exactly does volatility mean? And why does it matter?

Here’s Marketplace’s Adriene Hill.

Adriene Hill: When we talk about volatility, we’re talking about the ups and downs.

Mark Sebastian: I like to consider the market kind of like being in a car.

Mark Sebastian is the head of Option Pit Mentoring and Consulting. He says calm markets are kind of like driving on a freshly paved freeway.

Sebastian: This past week has been like driving over the most pothole-filled, crumbly, horrible, rocky road that you could possibly drive over.

All that bouncing around — that’s the volatility in the market. It’s risk. Think of it like this:

Charlie Wheelan: Let’s suppose I hired you for a job.

Charlie Wheelan teaches at the University of Chicago.

Wheelan: And said, ‘Look would you prefer to be paid $50,000 next year for sure? Or would you like it if we flip a coin at the end of the year, and if it’s heads you get $100,000, and if it’s tails you get nothing?’

He says, both offers average out the same way.

Wheelan: But for someone with a mortgage and tuition payments, the fact that it may come up zero is going to be deeply unsettling.

Short-term traders love volatility because a moving price means there’s money to be made buying and selling at the right time. But for the rest of us, the bumpy ride can make planning next to impossible.

Wheelan says volatility in the markets is caused, to a large extent, by all the things we just don’t know.

Wheelan: There’s just all kinds of fear and uncertainty, nobody really knows where the economy is headed, so we just tend to leap on and magnify the effect of either good news or bad news.

Italy is in trouble — markets swoon. U.S. consumers bought more stuff — markets jump. Those are the potholes and rocks. To smooth the road out, Wheelan says, will take figuring out what’s going on with the global economy. But it’s clarity that might take a while to find.

I’m Adriene Hill for Marketplace.

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