How to read stock market fear

Ron Bewley

Switzer Expert

Ron Bewley, PhD, FASSA
Executive Director
Woodhall Investment Research

Ron was Professor of Econometrics at UNSW when he was invited to join the Commonwealth Bank to found a Quantitative Research & Investment Strategy team. After researching across most asset classes in global markets, risk and strategy, he was appointed as the foundation Chief Investment Officer in CBA’s Private Client Services. He retired from the bank in 2009 and formed Woodhall Investment Research the following year.

In his first book, Allocation Models, Ron presents a unified econometric approach for analysing relationships that allocate aggregates across their component parts – as in wealth being allocated across asset classes. He published over 50 academic papers on a variety of theoretical and applied econometric topics. He held a number of visiting academic positions in the US, UK and Europe. Ron was elected Fellow of the Academy of Social Sciences in 1995. He was also consult to a number of major companies and government departments.

At Woodhall, Ron has combined his academic and markets experiences to produce cutting-edge solutions for implementing investment strategies in equities and other asset classes.

www.woodhall.com.au

Over the past month, I've introduced the concept of volatility based on the closing price of the ASX200 each day or each week. While that understanding is of major importance in managing a share portfolio, there are three other measures of volatility that are needed to get the most out of measuring uncertainty.

Intraday volatility
The VIX, or fear index
The disorder index

Intraday volatility

Let's look at this example: the market fell from about 6,800 in early November 2007 to just above 5,100 in late January 2008. It then rose to above 6,000 on 4 February 2008 before it again retreated.

As I show in the chart, the market rose about 170 points before morning tea on that day only to fall 193 points before rallying back above 5,850 at the close.

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