EXPERT CONTACT :
Cristian Tiu (pronunced Tee-yoo)
Professor of Finance and Managerial Economics
University at Buffalo
School of Management
It is not terribly surprising to see jumps in prices in either direction, Tiu says. “The VIX, an index measuring how uncertain option traders are about future prices, spiked up in May from around 25 percent in the first months of 2010 to over 40 percent this week. These values were seen in 2009, about the same time of the year - do you remember the uncertainty back then? With volatility that high, we can see big swings in prices - much like the one at this morning's open."
What causes this volatility in the markets? “Simply put, it’s the lack of certainty on where the economy is going. Tiu says. “For example, will the European Union survive in the current form? And how large the U.S. exposure is to the EU? When will we see inflation rising in the U.S.? How will the new financial reform affect the markets? Will the real estate markets recover by the time when commercial mortgages are due to refinance in 2012-2015?“
These are all questions without an answer, Tiu points out. “Traders guess, but their guesses are widely different, sending the stocks in the roller coasters we see.
These are all fundamental worries, but on top of them we were also witnessing some unexpected negative shocks: the BP oil spill (which stopped new permits for offshore drilling), riots in Greece and Thailand ... just like the sand storms in Oklahoma in the years of the Great Depression…terrible timing!”
Should we get depressed? Definitely not, Tiu says. “Some anxiety on the Euro bailout developed last night, but the German Parliament passed it today, although European indexes continued to fall even after that, indicating that the size of the package is still insufficient. Financial stocks moved up this morning, despite the new reforms, which sheds uncertainty in the way they will run. It does not seem to be easy to fix these problems, but it appears that the will is (still) there.”