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The volatility of events is correlated (and not always in a good way) – Marginal REVOLUTION

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That is the topic of my latest Bloomberg column, here is one excerpt:

Consider bad economic news, which is relatively unambiguous. With stock market returns, volatility is correlated over time, and it is higher in bear markets. To some extent the bad mood is contagious, and the bad events behind the volatility may be interlinked as well.

To be clear, the stock market has done fine lately. The latest bad news is about politics and public health, not corporate earnings. Still, the stock market is readily measurable and can offer clues about how broader social processes are connected over time — and one obvious conclusion is that volatility tends to feed upon itself, not usually in positive ways.

And:

Another problem is what my colleague Bryan Caplan has labeled “the idea trap.” Social science research indicates that in troubled times people are more likely to turn to bad ideas. The distressed German economy of the 1920s and early 1930s, for example, helped to breed support for the Nazis.

More recently, the global economy has been very much a mixed bag since the financial crisis of 2008. So people might begin to embrace worse ideas, which in turn will breed subsequent volatility. Such a cycle can worsen over time, and a ragged recovery from the Covid-19 deep recession could exacerbate this dynamic. It simply isn’t good for decision-making if everyone is feeling frazzled and stressed.

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