SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Historical Context
To aid in evaluating the magnitude of stock market volatility during the 2008 financial
crisis, it is useful to consider the current level of volatility in context of the historical
record. Figure 1 shows a graph of realized volatility on the S&P 500 index from January
2000 through December 2008. 1 As the graph indicates, market volatility began to rise
near the end of February 2007, and increased substantially in August 2007. Volatility
remained at levels comparable to the early 2000s until the middle of September 2008, at
which point volatility increased precipitously.
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Figure 1
S&P 500 Volatility, 2000-2008
Annualized Standard Deviation of Daily Returns
30-day rolling window
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Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Taking a step back to look at the longer historical record, Figure 2 shows a graph of
market volatility for the period 1900-1950 (upper panel) and 1951-2008 (lower panel).
This provides a comparison of the current volatility with that experienced during prior
crises. 2 As the graphs indicate, the volatility spike that occurred in the 4 th quarter of 2008
is roughly comparable in magnitude to those of other crisis periods: October 1929 and
October 1987. Note that the market experienced prolonged periods of very high volatility
during the Great Depression, particularly from 1931 to 1933, and from late 1937 to mid-
1940 but not after the market decline in October 1987.
1
In this graph, volatility was measured as the annualized standard deviation of log of daily returns over a
rolling window of 30 trading days.
2
The bottom panel is based on the returns of the S&P 500 Index. Because the S&P 500 index does not go
back far enough, the top panel uses alternative market indices compiled by the Center for Research in
Securities Prices (CRSP) beginning in 1926, and by Professor William Schwert at the University of
Rochester for the period prior to 1926.
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SEC_OEA_FCIC_001804