A question on volatility that I answered for another class.
A question on volatility that I answered for another class.
Q. If the government introduced a policy that was widely viewed as being able to reduce the future uncertainty in the stock market by requiring more transparency in accounting principles, what effect would this have on stock prices today? Relate this to the asymmetric volatility effect.
A.
A change in government policy toward more transparency should lead to overall fewer volatile markets. If we refer to the Modigliani Miller Information Hypotheses, in its strongest form, greater transparency will lead to more efficient markets.
Taking this thought a step further, more efficient markets will result in price discovery offering a more complete information set and thus, less unsystematic shocks. The asymmetric effect would then dictate that as stocks rise there is less volatility. It also proposes, through observation, more volatility when markets are sold down indiscriminately. This is probable due to margin calls and in part to behavioral theory, or panic, stemming from uncertainty.
Since transparency should remove some of these indeterminate factors, we should see an general reduction in volatility as the markets will experience less shocks.
Q. If the government introduced a policy that was widely viewed as being able to reduce the future uncertainty in the stock market by requiring more transparency in accounting principles, what effect would this have on stock prices today? Relate this to the asymmetric volatility effect.
A.
A change in government policy toward more transparency should lead to overall fewer volatile markets. If we refer to the Modigliani Miller Information Hypotheses, in its strongest form, greater transparency will lead to more efficient markets.
Taking this thought a step further, more efficient markets will result in price discovery offering a more complete information set and thus, less unsystematic shocks. The asymmetric effect would then dictate that as stocks rise there is less volatility. It also proposes, through observation, more volatility when markets are sold down indiscriminately. This is probable due to margin calls and in part to behavioral theory, or panic, stemming from uncertainty.
Since transparency should remove some of these indeterminate factors, we should see an general reduction in volatility as the markets will experience less shocks.
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