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The Journal of Index Investing

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With Greater Uncertainty Comes Greater Volatility

Inna Zorina, Jamie Khatri, Carol Zhu and James J. Rowley
The Journal of Index Investing Winter 2019, 10 (3) 6-14; DOI: https://doi.org/10.3905/jii.2019.1.077
Inna Zorina
is a senior investment analyst at The Vanguard Group in Southbank, Victoria, Australia
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Jamie Khatri
is an investment research analyst at The Vanguard Group in Malvern, PA
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Carol Zhu
is an investment product strategy analyst at The Vanguard Group in Shanghai, People’s Republic of China
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James J. Rowley Jr.
is head of active/passive portfolio research at The Vanguard Group in Malvern, PA
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Abstract

Some academics and market participants argue that the growth of indexing causes market volatility. However, while the percentage of assets in indexed strategies has grown over the past twenty-five years, market volatility has risen and fallen in a somewhat random pattern, peaking around economic and financial crises. In this article, we test two measures of market volatility for their potential relationship with growth in indexing assets and selected macroeconomic factors. Our analysis demonstrates that macroeconomic factors have a strong correlation with and are useful predictors of market volatility; on the other hand, growth in indexing assets does not exhibit any causal relationship with market volatility.

TOPIC: Volatility measures

Key Findings

  • • Macroeconomic factors and market volatility have a strong positive correlation while correlation between market volatility and growth of indexing is negative and relatively small in absolute terms.

  • • Granger causality tests suggest that macroeconomic factors do have a causal relationship with and are useful predictors of market volatility. Growth of indexing, however, does not have such a relationship and is not a useful predictor of market volatility.

  • • Macroeconomic factors such as economic policy uncertainty—not the growth of indexing assets—are responsible for elevated market volatility.

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The Journal of Index Investing: 10 (3)
The Journal of Index Investing
Vol. 10, Issue 3
Winter 2019
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With Greater Uncertainty Comes Greater Volatility
Inna Zorina, Jamie Khatri, Carol Zhu, James J. Rowley
The Journal of Index Investing Nov 2019, 10 (3) 6-14; DOI: 10.3905/jii.2019.1.077

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With Greater Uncertainty Comes Greater Volatility
Inna Zorina, Jamie Khatri, Carol Zhu, James J. Rowley
The Journal of Index Investing Nov 2019, 10 (3) 6-14; DOI: 10.3905/jii.2019.1.077
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  • Article
    • Abstract
    • MEASURES OF MARKET VOLATILITY
    • VOLATILITY IS NOT LINKED TO THE SIZE OF INDEXING
    • MARKET VOLATILITY IS CORRELATED WITH MACROECONOMIC FACTORS
    • TESTING THE RELATIONSHIP OF MARKET VOLATILITY WITH GROWTH OF INDEXING AND MACROECONOMIC FACTORS
    • MULTIVARIATE REGRESSION ANALYSIS
    • ANALYZING THE CAUSAL RELATIONSHIP BETWEEN MARKET VOLATILITY, GROWTH OF INDEXING, AND POLICY UNCERTAINTY
    • CONCLUSION
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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