After a subdued beginning in the first half of the year and getting past the normally volatile month of May, Sensex volatility has started growing above 10-year averages. Sell-off on sub-prime scares and unwinding yen carry seem to have triggered uncertainties of sorts resulting in wild swings of around 500 points, as seen on Friday August 17.
The average volatility, as measured by the standard deviation of Sensex?s daily close price has been at 2.00% as compared to the ten year average of 1.6%. Despite repeated entry and exits of foreign institutional investors and mutual funds, volatility was low at 1.40% even beyond the first half. In fact the first quarter of the fiscal, especially May, have been traditionally volatile months, as observed in data for the past ten years.
Data processed for the past ten years suggests that volatility is not a new feature in the Indian markets. There have been several occasions in the past where the Sensex has swung wildly where the monthly standard deviation average has been in excess of 3%. ?Compared to those years, the current volatility is not that excessive? says a trader on the exchange. The fact that the Sensex is now at 15,000 levels, a swing of 500 to 600 points does not amount to much in percentage terms.
Globally, there have been other markets that have witnessed higher volatility since the beginning of the year. In fact India appears to have the lowest volatility amongst the BRIC markets. However, when compared with the returns (returns minus standard deviation), the Sensex just about manages to stay in the positive zone with Russia scoring negative returns. China outscores in the rest of the market place.
Going ahead, market men believe that volatility will remain to be high in the market as there are just too many uncertainties in the market place. While sub-prime scares and another large sell-off due to unwinding of yen carry trades remain the main concerns, rising inflation and political misgivings also add up.