150 years of volatility

Researchers at the Bank for International Settlements have come up with 150 years of financial market volatility history of stock and bond returns for Australia, Canada, France, Germany, Italy, Japan, UK and the US, starting in 1850 to 2005. Their main conclusions are of interest to investors with a long investment horizon such as pension funds:

First, volatility is dominated by large, temporary increases that appear correlated with episodes of economic weakness, political instability and financial turmoil.

Second, volatility has been much higher from the 1970s onwards than it was previously. This finding appears surprisingly robust across countries and financial instruments. Seeking to explain it would be an important topic for future research.

Third, the movements in volatility that have been observed in recent years are small from a historical perspective. These findings suggest that financial institutions and policymakers alike would be well advised to note that a sharp increase in volatility from the level observed in the last few years would not be unprecedented.

An inconsistency between bullet points 2 and 3 is only apparent in so far as volatilities have risen considerably above their long term historical averages since 1970, but have come off their peak levels in recent years, which suggests that a rekindling might not at all be out of the question.