糖心TV

Perceptions of financial volatility

Stock prices in financial markets rise and fall, sometimes dramatically, thus asset returns exhibit volatility. In finance theory, volatility is synonymous with risk and as such represents the dispersion of asset returns about their central tendency (i.e. mean, μ). The conventional measure of volatility in finance theory, therefore, is the standard deviation, σ, of asset returns.

When individuals make investment decisions, influenced by perceptions of risk and volatility, they commonly do so by examining graphs of historic price sequences rather than returns. It is unclear, therefore, whether standard deviation of return is foremost in their mind when making such decisions. We conduct an experiment to examine the factors that may influence perceptions of financial volatility, including standard deviation along with a range of price-based factors (e.g. number of changes in direction, number of peaks and troughs, number of highs and lows, mean absolute price change etc.). While standard deviation may have a role to play in perception of volatility, we find evidence that other price-based factors play a far greater role, thus calling into question the finance theory perspective.