Have you ever felt that nothing in the business world seems certain? What causes this anxiety? The culprit is volatility, which is a measure of market fluctuations in a complicated world where it is often wisest to expect the unexpected. When sudden and unpredictable shocks to prices and markets occur, they can bring corporate giants such as Lehman Brothers and General Motors to their knees and alter the course of industries. Volatility can render sound business strategies and valuable core competencies utterly ineffective.
This graph shows the volatility of stock prices before, during, and after the financial crisis of 2008. While volatility was normal in much of 2007 and early 2008, it jumped significantly with the fall of Lehman Brothers in late 2008 and took nearly a year to return to normal. This episode of stock price volatility reflects the confluence of instability in numerous underlying markets and economic fundamentals that caused investors to run for cover and governments and corporations to scramble. It caused great upheaval in commodity markets, which led to a renewed focus on understanding and managing risk. Therefore, volatility causes every concerned executive to ask, “How do I confront this volatility?”
A critical step in confronting volatility in your own company is to understand it and track it. Research shows the key insight that volatility behaves in predictable patterns and when it changes unexpectedly, such changes do not persist indefinitely. In fact, applied statistical methods can be used to develop forecasts of future volatility that can help you anticipate the level of uncertainty in the future and decide if it is worthwhile to reduce this uncertainty to an acceptable level using risk management.
How confident do you feel in your company’s ability to confront volatility? Is your company using optimal volatility forecasts? The Accenture Academy course Forecasting Volatility with ARCH and GARCH Models provides an important piece toward solving the volatility puzzle. It enables concerned executives like you to measure and understand volatility and use two advanced but commonly used statistical models to track and forecast volatility using very basic data.