Volatility clustering
Volatility clustering refers to the tendency of financial markets to experience periods of high volatility (large price swings) followed by more high volatility, and periods of low volatility followed by more low volatility. This means that if the market is volatile today, it's likely to remain volatile for a while. It challenges the idea that price changes are random and independent. Understanding volatility clustering helps investors anticipate market behavior, as it suggests that past price movements can indicate future movements, particularly in uncertain times.
Additional Insights
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Volatility clustering refers to the phenomenon where high levels of uncertainty or volatility in financial markets tend to follow more periods of high volatility, while low volatility periods are often followed by more low volatility. This means that if the market experiences a sudden increase or decrease in prices, it's likely to continue experiencing similar swings for a while. Investors often notice this pattern, making it important for risk management and forecasting. In essence, when the market gets turbulent, it tends to stay turbulent for some time, rather than returning quickly to calm conditions.