Does higher volatility mean higher risk?
Anyone who follows the stock market knows that some days market indexes and stock prices move up and other days they move down.
This is called volatility.
The more dramatic the swings, the higher the level of volatility—and potential risk..
How does credit risk affect liquidity?
As a consequence of this asset deterioration, more and more depositors will claim back their money.
The bank will thus call in all loans and thereby reduce aggregate liquidity in the market.
The main result is therefore that higher credit risk accompanies higher liquidity risk through depositor demand..
How is risk related to volatility?
Volatility is a way to calculate the risk of a particular investment, over a set period of time.
A highly volatile investment is likely to experience more frequent, and possibly large, upward and downward movements in price than an investment with low volatility..
What's the difference between risk and volatility?
At its simplest, volatility is a way of describing the degree by which share price values fluctuate.
In volatile periods, share prices swing sharply up and down while in less volatile periods their performance is smoother and more predictable.
Risk, on the other hand, is the chance of investments declining in value..
Why volatility is not a good measure of risk?
The calculation of volatility makes two big assumptions: first, that returns are normally distributed, and second, that correlations are stable.
Neither is true.
A cursory glance at equity return data over very long periods shows that the distribution of returns is subject to both skewness and positive kurtosis..
- However, volatility isn't an effective measure of long-term risk.
Commonly represented by standard deviation in finance, volatility is a statistical measure of up and down price fluctuations over time.
Investments with rapid, dramatic price swings are considered highly volatile.
