Volatility at peak during 3-day market crash
31 Jan, 2008, 0750 hrs IST,Ashish Agrawal, TNN
While the magnitude of market crash last week was itself unparallel, the sharp rise in intra-day volatility of the stocks during the first three days of the week had been equally devastating.
On Tuesday, the second day of sharp meltdown, Reliance Natural Resources saw an intra-day volatility of 66%, the highest, closely followed by Neyveli Lignite, at 62.3%. The significance of the number is evident from the fact that this volatility is almost 10 times the average intra-day volatility over previous 365 days.
While intra-day volatility was maximum on Tuesday, even Monday saw volatility of up to 48%, and Wednesday, when market saw respectable recovery, the volatility was up to 40%.
Volatility refers to the variation in the value of the stock and thus measures its instability. While there are complicated mathematical ways of calculating volatility, a simple method is by looking at the highest and lowest value of the stock.
A 66% intra-day volatility means that a stock, which touched a high of Rs 100, saw a low of Rs 50 during the day. A high of Rs 100 and a low of Rs 60 would imply a volatility of 50%.
The phenomenon was not restricted to some sectors or some specific stocks and most of the stocks were badly mauled. This is evident from the fact that for 100 companies with m-cap of more than Rs 10,000 crore, average intra-day volatility has moved up to 25% on this particular day, from 4.3% during the year. For nearly 400 companies in the m-cap range of Rs 1,000-10,000 crore, the volatility has moved up from 4.9% to 22.9%.
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Apart from the panic selling, significant increase in open interest in the F&O market, over last few months aggravated this sharp jump in intra-day volatility. This led to unwinding of these positions with the sharp meltdown on Monday, triggering a collapse on Tuesday.
The analysis shows that among the sectors, metals, energy, power and IT were the worst hit. However, intra-day volatility of the indices has been much lower, despite high volatility of individual stocks. Because of large composition of the index, where some stocks may have seen less volatility.
Among the indices, only BSE mid-cap index had an intra-day volatility nearly 10 times that of yearly average. For the index, the volatility went up to 16.9% from yearly average of 1.7%. BSE auto index was, surprisingly the other index, to see maximum change in volatility, recording nearly seven times increase in volatility over the yearly average.
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Next: Futures Fundamentals: A Brief History
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