Man Group Discusses Volatility and Risk Relationship

Man Group's Academic Advisory Board met in September 2014 to delve into the complexities surrounding volatility and its relationship with risk.

The discussion highlighted that while volatility, or the fluctuation in an asset's price, is a common measure of risk, it is not sufficient on its own to capture all investment-related risks. Investors' preferences regarding skewness or tail risks can render volatility an inadequate sole indicator.

Academics noted that rational factors alone, such as news related to future cash flows, interest rates, or risk aversion, do not fully explain market volatility. Behavioral effects, like over-extrapolation or optimism, can contribute to excess volatility.

Furthermore, the board observed that periods of low volatility can paradoxically indicate increased risk, as investors may take excessive chances. Research is also shifting from traditional models to utilizing high-frequency data for volatility forecasting, though progress in fundamental models has slowed.