SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

OFFICE OF ECONOMIC ANALYSIS
DRAFT MEMORANDUM
To: Distribution List
From: Office of Economic Analysis
Date: Revised: February 2, 2009
Re: Abnormal Market Volatility and the 2008 Market Crisis
This memo provides statistical information and analysis relating to stock market volatility
during the market crisis, especially since September 2008. In order to better understand
whether the volatility during the 2008 financial crisis differs from that experienced during
other turbulent periods, such as October 1929, the Great Depression, and October 1987,
we provide information about market volatility over more than a century. We evaluate
volatility both on a daily basis as well as intraday. We also provide information on how
market volatility in the United States has compared with market volatility in other parts
of the world during this period. Some of the key points are:
• Realized volatility from mid-September through November 2008 was extraordinarily
high, reaching levels comparable to October 1929 and October 1987. [Figures 1, 2]
• History suggests that if the financial crisis continues unresolved, equity markets are
likely to continue experiencing high volatility. During the Great Depression, markets
experienced prolonged periods of very high volatility, especially between 1931 and
1933 and between 1937 and 1940. [Figure 2]
• Volatility declined substantially between November 2008 and December 2008, but
remained above its long-run average. The CBOE VIX index, which is a forwardlooking
measure designed to gauge the market’s forecast of future volatility, declined
from a peak above 80 on November 20 to close at 40 on December 31, 2008, and
remained in the 40s most of the time in January 2009. [Figure 3]
• After normalizing volatility to correct for changes in the overall level of volatility and
the typical pattern in intraday volatility, volatility in the last half hour of the day was
abnormally high during the 4 th quarter of 2008, compared to historical norms. A
similar phenomenon of abnormally high volatility near the end of the day was
observed in other periods of market instability, such as in 1987 and 1997. [Figures 4-
8].
• The large increase in volatility observed in the United States was also observed in the
world’s other equity markets. Peak volatility in Europe during October and November
was comparable to that in the U.S., while volatility in Japan and Hong Kong was
higher. [Figures 9-10].
• Other results include:
SEC_OEA_FCIC_001802