managing volatilities in the capital market market... · 2014. 8. 4. · managing volatilities in...

MANAGING VOLATILITIES IN THE

CAPITAL MARKET

Presented by

Oscar N. Onyema

CEO, The Nigerian Stock Exchange

for

Risk Management Association of Nigeria (RIMAN)

11th Annual Conference

Sheraton Hotel, Ikeja

September 22, 2011

22/09/2011 1The Nigerian Stock Exchange

• Capital Market Performance

• Volatility and Market Performance

• Positives and Negatives of Volatility

• Managing Volatility

• Bright Outlook

Outline

22/09/2011 The Nigerian Stock Exchange 2

The measure for variation of price of a

financial instrument over time.

It is used to quantify the risk of the financial

instrument over the specified time period.

It is usually expressed in annualized terms,

and may be either an absolute number

(N5) or a fraction of the mean (5%).

Actual current volatility is based on

historical prices over the specified

period with the last observation being

the most recent price.

Volatility


Capital Market Performance

(Equities, 1996-2010)


160

170

180

190

200

210

220

-

2,500,000

5,000,000

7,500,000

10,000,000

12,500,000

15,000,000

17,500,000

20,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Mkt. Cap. (000,000) Shares Traded (0,000) No. of Listed Companies

Nai

ra

Investors with a long-term investment strategy

would have maximized on their investments in

this time period.

Return on Investment

(Equities, 1996-2007)


Capital Market Activity

(Equities, 2008-2010)


-

5,000

10,000

15,000

20,000

25,000

-

5

10

15

20

25

Avg

. Dea

ls p

er D

ay

Avg

. Dai

ly V

alu

e (B

illio

ns)

Share Value Deals

• High rates of margin lending

• Bank over-exposure

• Market downturn

• Failed risk management processes

• Unseen rate of default

• Excess distressed debts

• Illiquid financial and capital system

Result:

Financial market crash

2008/2009 Financial Crisis


• Volatility

– eg., CBOE Volatility Index (VIX): An up-to-the-minute market estimate of

expected volatility that is calculated by using real-time S&P 500® Index (SPX)

option bid/ask quotes. VIX uses “nearby” and “second nearby” options with at

least 8 days left to expiration and then weights them to yield a constant, 30-day

measure of the expected volatility of the S&P 500 Index.

– No market volatility index currently available for the Nigerian market

• Market Performance

– Strong relationship between volatility and market performance

– Volatility tends to decline as the stock market rises and increase as the stock

market falls

– When volatility increases, risk increases and returns decrease

– Risk is represented by the dispersion of returns around mean

– Greater dispersion of returns around the mean, triggers larger drops in the

compound return

Volatility and Market Performance


• Using the volatility and market performance argument, recent

stock market activity has resulted in:

Using the Volatility and Market

Performance Argument


3-year bear market

Rising volatility

Lingering perceived

risk

Lower returns

Does not measure the

direction of price changes

Types of assets experience

periods of high and low volatility

Volatility is one-of-many

measures of risk

The Truth About Volatility


Volatility presents

investment opportunities

• Investors

– Wider swings in investment prices trigger

uncertainty/panic

– Higher volatility means a greater chance of a

shortfall of a near-future security sale

– Higher volatility of returns results in a wider

distribution of final portfolio values when

saving for the long-term (retirement)

– Higher volatility of return gives withdrawals a

larger permanent impact on the portfolios

Positives & Negatives of Volatility


• Traders

– Is the basis for all options pricing models, and

forms the core of several options trading

strategies

– Drives speculative trading which enhances

liquidity

– Provides an opportunity to acquire previously

illiquid assets

– Speculation-driven liquidity may trigger higher

international participation

– Negatively affects investment strategy due to

binary market trends (ie., extreme movements

in either direction) caused by “herd” mentality

market uncertainty

Positives & Negatives of Volatility contd.


• Portfolio Analysis/Rebalancing and Asset Allocation

• Statistical Tools and Models

– Standard Deviation

– Moving Average of Share Price

• Liquidity

– New Programs

• Market Making

• Short Selling

• Securities Lending

• Open/Close and Intraday Auctions

• Risk Management

– Existing smoothening factors

• 50k-unit min. to move price (Originally implemented for curbing market manipulation)

Managing Volatility


Capital Market Activity in 2011

(Equities, Jan-Jul)


-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

-

1

2

3

4

5

6

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11

Avg

. Dea

ls p

er D

ay

Avg

. Dai

ly V

alu

e (B

illio

ns)

Share Value Deals

Market volatility sparked widespread uncertainty,

which spooked the market and

drove perceived risk to the highest levels

ever seen in our marketplace.

Volatility vs. Uncertainty vs. Risk


Outlook: The Future is Bright


• Markets are cyclical

• Periods of volatility are

natural

• Opportunities exist in the

current marketplace

• NSE is focused on shifting

the tide

• The market is committed to

turning the corner

MANAGING VOLATILITIES IN THE CAPITAL

MARKET

Q&A


The Nigerian Stock ExchangeStock Exchange House

2-4 Customs Street

P.O. Box 2457, Marina

Lagos Island

Lagos, Nigeria

[email protected]

www.nigerianstockexchange.com

Thank You


mailto:[email protected]

managing volatilities in the capital market market... · 2014. 8. 4. · managing volatilities in...

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