Market Volatility

People have been asking me whether yesterday’s stock market drop indicates a significant incipient increase in volatility. The answer, I’m now quite confident, is maybe.

That’s not such a trivial answer, really. If you have a subjective probability distribution concerning volatility, you should definitely revise upward the mean of that distribution. In most cases, that means acting as if there has been a moderate, but not large, increase in volatility. There is a very good chance that the actual increase in volatility will turn out either to be very small or to be quite large. Given the possibility that it could be quite large, there is reason to change ones behavior, but since that is only a possibility, the change in behavior probably should not be dramatic.

μηνιν αειδε θεα

It's just an excuse to use the beginning of the Iliad as a title for this post, but here's a link to Greg Mankiw's post on anger.