Fischer Black, Massachusetts Institute of Technology
This article explains the analysis of Fischer Black on the volatility of underlying shares that flow in the cash market. Fischer Black also determines and explains how futures trading affect cash market volatility. Volatility may be described as a time series indicator which enables traders to quantify changes in market prices. Volatility can be characterized as historical or implied. Historical volatility measure stock price changes by using historical stock price data, while implied volatility is a stock’s current volatility, which is measured by using the stock’s option price. According to Fischer, volatility creates inconsistency in price trends; this results in a situation at which formulas for volatility can be changed according to the predictability of volatility.
Fischer identified four factors that affect volatility. These are;
• How changes in stock returns relate to volatility.
• The degree at which expected changes in volatility can be forecasted.
• How volatility changes on different stocks relate to each other.
• Difference across stocks in the size of the typical change in volatility (Fischer Black)
Apparently, there is a fixed relationship between stock prices changes and volatility changes. Fisher Black used several testing simulations to decipher that a relationship between stock prices and the volatility of the prices does exist. This encouraged Black to investigate and determine the cause and nature of this relationship, the procedures of impending changes in volatility, and whether the relationship is centered on a stock’s volatility. In order to arrive at a appropriate conclusion, Black performed several tests by utilizing data which he collected on a daily basis and over a short period of time. Black performed regression analysis on his collected data and this gave him a...