An Alternative Way to Visualize Volatility

One way to look at volatility of stock markets is to look at the standard deviation of returns or a volatility index like the VIX. Another way is to look at the average stock’s performance on days when the stock market (in this case the MSCI World Index) is up and on days when it is down. That is precisely what we do in the charts below. What we find is that the average stock’s performance on both up market days and down market days has been trending lower since the world markets bottomed in October 2011 (i.e. upside and downside volatility has been trending lower). We also observe that lows in this measure of volatility tend to coincide with intermediate market tops and highs tend to coincide with in intermediate market bottoms. Not rocket science, just a different way to measure how stocks in the aggregate are behaving.

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