Why We Should Worry about Volatility: Market Fluctuations, Economic Impact, and Consumer Vulnerability
Overview
This paper examines market volatility, defined as price fluctuations in commodities and securities, exploring its causes, advantages, and disadvantages. While volatility can benefit investors, the paper argues that extreme price fluctuations pose significant risks to vulnerable populations including consumers and small-scale producers, particularly regarding food and energy security.
What this essay covers
- Introduction: Definition of volatility and its measurement in financial markets
- Factors that Cause Volatility: Economic policies, crises, political developments, and global interconnectedness
- Advantages of Volatility: Investment opportunities and short-term trading benefits
- Disadvantages of Volatility: Economic shocks, food security threats, and producer vulnerability
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Why we Should Worry about Volatility
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Introduction
Volatility refers to fluctuations in the price of a commodity in the market. In this aspect, it is measured by daily differences (in terms of percentage) in the price of the specified commodity. In terms of the stock market, volatility is a measure of the dispersion of returns for a given market index or security (Gatheral et al., 2018). For instance, if the stock market increases and decreases more than 1% over a period, such a market is described as volatile. The core characteristic of a volatile market is the wide price fluctuation as a result of heavy trading. Volatility in prices (or stock market) has both advantages and disadvantages. The advantages are desirable, but they only favor a few people in the market. The disadvantages, however, should be a cause of concern because they affect a large number of people, and especially those in vulnerable situations like small scale farmers.
Factors that Cause Volatility
Driving forces behind fluctuation have a direct impact on the volatility of a market. Such forces include changes in national economic policy, economic crises, economic indicators, political developments, public relations, and unstable overseas prices. The COVID-19, for instance, has led to an economic crisis affecting the world today. As a result, the world has experienced negative oil prices and therefore, making oil market volatile.