Uncertainty in the Stock Markets

amandstu

I have heard it said that the Stock Markets hate uncertainty.

Could it be (and apologies if this is a statement of the bleeding obvious) that this is a good indicator of whether the overall index is likely to fall ?

If so (and assuming that I am not the only person to have realised this) does it follow that when there is a general uncertainty in the background (as for example the upcoming vote regarding the government spending ceiling in the USA) that that is perceived as being a dampener on the bull aspect of the shares market and allows those who use it as a guideline to future values to make a profit in an easy way? (as I said it is probably "bleeding obvious").

So as a corollary might it be that if the various Dpts of Finances around the world were able to create an ongoing "measure of uncertainty" in the Stock Markets that this could be a way of putting a dampener on the self reinforcing cycles of mass buying and selling that can cause such disruption?

If the Bank of Ireland was to judge that the ongoing climate was one of uncertainty then could it somehow slow down transactions with red tape or equivalent until such time as the uncertainty was judged to have lifted ? (how essential is it that transactions proceed at the speed of light ? If I want a passport I can't get one in point zero 3 of a millisecond but my world doesn't collapse).

As for the mechanisms for the Depts of Finance to use could that just be left up to them as wise old birds or could there even be algorithms developed for this purpose (only as an aid probably since computer assisted purchases are probably as responsible as anything for the crashes and allowing them - the computers that is - to add an uncertainty parameter to their program might make them even more potentially harmful)

Or could said Depts of Finance run a dummy speculator (a bit like the CIA) to gauge the mood (of uncertainty or not) on the ground? He or she would have a monetary allowance to permit them to communicate with the other dealers.Who knows he might even be able to pull in a few rogue dealers or insider traders along the way?

Voltex

I had to read your post a number of times to fully understand the gist. Great post by the way..a very interesting point of view.

I suppose the best known measure of volatility and uncertainty is the VIX index..also known as the "fear" index. If Im right, you think that the opportunities gained by speculators and short sellers in markets is wrong and that the worlds financial leaders should co-ordinate to combat these guys? If so I think it goes against the essence of capitalism and free markets.

If we bring it down to the Corporate or Business level, a natural facet of life is change (I like to look at this in terms of a corollary of the second law of thermodynamics; entropy). Be it globalisation, technology, economic or societal, changes occur and create turbulence within business and commerce. there's nothing that we can do about it..except trying to mitigate its effects, so businesses have learned how to scan the environment they operate within and to respond. Obviously the level of certainty and stability within a market varies considerably...to try and circumvent the natural laws of physics (i.e change or entropy) in the business sense we react by either trying to apply more control (e.g TQM, JIT, Basel I II III), exit a market or enter a new one.

Creating artificial conditions that are muffling business entropy is futile. Business will evolve and grow...but as change occurs, revolutions change how the organisation manages and structures itself in response to the stimulant or agent of change.

amandstu

"you think that the opportunities gained by speculators and short sellers in markets is wrong and that the worlds financial leaders should co-ordinate to combat these guys?"

If what they are doing is legal then no.Otherwise why not? If it is legal but still harmful then change the law.

If any proposed new law is completely unenforceable then don't bother.

What constitutes "harmful" ? Losing equilibrium ?

Should there be (are there?) laws/regulation to maintain a desired level of equilibrium in Financial Markets? Can they be avoided?

By the way I wonder what will be the outcome of the Eu Financial Tax proposal (the Tobin Tax or the Robin Hood Tax I think it is called).
The Eu lawyers indicated it could be illegal last month. Will it go ahead somehow or will it be quietly dropped?

Voltex

amandstu wrote: »

"you think that the opportunities gained by speculators and short sellers in markets is wrong and that the worlds financial leaders should co-ordinate to combat these guys?"

If what they are doing is legal then no.Otherwise why not? If it is legal but still harmful then change the law.

If any proposed new law is completely unenforceable then don't bother.

What constitutes "harmful" ? Losing equilibrium ?

Should there be (are there?) laws/regulation to maintain a desired level of equilibrium in Financial Markets? Can they be avoided?

By the way I wonder what will be the outcome of the Eu Financial Tax proposal (the Tobin Tax or the Robin Hood Tax I think it is called).
The Eu lawyers indicated it could be illegal last month. Will it go ahead somehow or will it be quietly dropped?

The financial wizardry of the last decade especially has helped create wealth and growth. Where you draw the line I don't know..but to me such things as naked short selling and naked CDS probably are more un-ethical than others.

The economic cycle is just that..cyclical..we have ups and downs. Change occurs and in theory we made so much cash during the peak we can manage the trough. What triggers the change is anyone's guess, but certainly technology and globalisation are the recent 2 biggies.

If I go back to my notion of entropy...in order to maintain a system at a certain level of energy or order (from order to chaos), requires the expense of further energy. If we translate that into the business or market sense we would need to expend more and more energy to hold or control the system at a certain state (equilibrium). The natural pressures of entropy become so large that the energy level required to maintain equilibrium approach infinity...which philosophically probably leads to the economic notion of laissez faire.

People do try and model uncertainty as you suggest at all different levels - banks, hedge funds, academics, farmers estimating how much silage they will need for the winter, savers deciding whether to lock in saving to a long term rate or a demand deposit etc. (Volatility)

The uncertainty in the stock market in your example is the sum of all of the above.

When you say the Bank of Ireland do you mean the Central Bank?

The Department of Finance does presumably engage in some forecasting to try to estimate incomes and expenditures - I don't see the benefit in their trying to influence that.

Certain EU countries had tried to introduce a Financial Transactions Tax which would slow down transactions but this has been ruled illegal: http://www.boards.ie/vbulletin/showthread.php?t=2057036757

Edit: If the various departments started trying to manage uncertainty others would try to second guess them and to profit from that one way or another.

amandstu

Deleted User wrote: »

The uncertainty in the stock market in your example is the sum of all of the above.

That is not what I had in mind when I said "uncertainty" .I was thinking of a general sentiment of lack of trust ; a kind of a "wait and see" feeling.There is a fly in the ointment somewhere.

When you say the Bank of Ireland do you mean the Central Bank?

Yes I am sorry about that.



Edit: If the various departments started trying to manage uncertainty others would try to second guess them and to profit from that one way or another.


Indeed that seems to me to be a very fundamental factor to nearly all sorts of interventions.I am surprised it hasn't got its own name.There are so many other similar ideas that do have - for example the law of diminishing returns , virtuous/vicious cycles , sod's law , the peter principle etc etc . (the uncertainty principle just applies in physics and it wouldn't cover this situation of yours anyway)

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amandstu

amandstu wrote: »

That is not what I had in mind when I said "uncertainty" .I was thinking of a general sentiment of lack of trust ; a kind of a "wait and see" feeling.There is a fly in the ointment somewhere.

That could probably only be resolved by something happening (or not happening).

The ECB could try and counteract the uncertainty caused by the US shutdown but I cannot imagine how expensive or damaging it might be to the domestic economy. It could be a case of the cure being worse than the disease.

The very act of taking action to counteract uncertainty could cause its own uncertainty - how long will it last, how far will they go etc.

We can all take views on the future but cannot know for certain.

Edit: The type of situation you describe did occur when the banks stopped lending to each other. In that case it did take intervention from various central banks and time for the 'wait and see' feeling to subside but we are probably still feeling the after effects today.

Rightwing

I've given up trying to second guess the markets. Everything seems to have gone out the window over the last few years.

hmmm

amandstu wrote: »

I have heard it said that the Stock Markets hate uncertainty.

Participants in markets love uncertainty, it encourages people to buy/sell and drives swings in the markets. Only the long term passive index investor makes money in a boring market that is slowly rising.

I've read what the OP said twice but I still can't make out a point.
"could said Depts of Finance run a dummy speculator (a bit like the CIA)"
"putting a dampener on the self reinforcing cycles of mass buying and selling that can cause such disruption"
"to add an uncertainty parameter to their program"

huh?

amandstu

Well the central point (in the kingdom of my mind) was that "uncertainty" was like a contagion whose results could be reliably predicted ( a fall in the otherwise expected level of the indices ).

I further assume that this is an open secret and so it allows speculators to sell risk free (assuming they get in quick :ie sell)

I then wonder if the Financial authorities might not be able to monitor the level of "uncertainty" so as to somehow mitigate the effects -by putting a temporary limit on the speed of transactions.

Since this may not hold water then the bit at the end about undercover agents which went of at a tangent may be even more tenuous- although since my instinct is that speculators are borderline criminals in the first place the idea of undercover agents with possibly ficticious shares would appeal to me.

Thanks for the "huh?" though. It probably made more sense than the whole of my post!