A:

Volatility is defined and measured in several different ways, making it somewhat difficult to generalize the impact of central bank decisions. In its most broad interpretation, market volatility refers to the size of the range of market swings in major exchanges or indexes. Most investors and analysts consider volatility a corollary to risk, thereby relegating the meaning of volatility as shorthand for "likelihood of suffering financial loss."

Most countries around the world rely on central banks to enact monetary policy and regulate private savings and loan institutions. Major central banks such as the Federal Reserve in the United States or the Bank of England are charged with the role of minimizing economic volatility, injecting liquidity into the financial system, promoting full-employment and reducing fears of inflation or deflation.

In this sense, there are some competing views on the actions of central banks. Many believe that by curtailing negative macroeconomic phenomena, central banks limit market volatility and provide reassurance to investors. There are some notable critics of central bank policy tools as well. It is possible for interest rate manipulation and money stock creation to distort financial markets and encourage misallocation of capital, creating asset bubbles that lead to increased volatility down the road.

It is difficult to estimate just how much central bank policy decisions should impact an investment strategy. Banks' actions do not directly target stock prices, and they can be difficult to capture inside technical indicators. There are some metrics used by market participants to gauge current and past volatility, such as the S&P Volatility Index, the FTSE 100 on the London Stock Exchange. However, these rely heavily on variables, such as standard deviations in large cap stock prices, that are not controlled by central banks.

RELATED FAQS
  1. If the stock market is so volatile, why would I want to put my money into it?

    In this question, volatility refers to the upward and downward movement of price. The more prices fluctuate, the more volatile ... Read Answer >>
  2. How does implied volatility impact the pricing of options?

    Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >>
  3. How far back in a stock's history should you go when gauging its volatility?

    Discover why it can be difficult for investors to figure out how far back to go into a stock's history when gauging its volatility. Read Answer >>
  4. What is the best measure of a given stock's volatility?

    Understand what metrics are most commonly used to assess a security's volatility compared to its own price history and that ... Read Answer >>
  5. How can central banks use open market operations to manipulate short-term interest ...

    Discover how central banks use open market operations to manipulate short-term rates. Short-term rates are key inputs into ... Read Answer >>
Related Articles
  1. Insights

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  2. Tech

    Can Bitcoin Kill Central Banks?

    Bitcoin is a peer-to-peer unofficial currency that operates without government or central bank oversight. Can Bitcoin kill off the need for central banks?
  3. Investing

    Roller coaster 2016 for Stocks? Exploring Global Stock Volatility

    Find out how much volatility global equity investors are in for during 2016 by seeing how much they've experienced over the past five years.
  4. Investing

    Volatile Stocks: Great, If You Have The Stomach

    Volatile stocks can be a lucrative opportunity for short-term traders. For buy-and-hold investors, it's a much different story.
  5. Investing

    3 Reasons to Ignore Market Volatility (VIX)

    If you can keep your head while those about you are losing theirs, you can make a nice return in roiling markets.
  6. Personal Finance

    What Is The Bank For International Settlements?

    Get the scoop on the structure and functions of the oldest global financial institution.
  7. Investing

    Get To Know The Major Central Banks

    The policies of these banks affect the currency market like nothing else. See what makes them tick.
  8. Investing

    Tips For Investors In Volatile Markets

    Find out what to look out for when trading during market instability.
  9. Insights

    How the Fed Profits From Quantitative Easing

    Central Banks including the U.S. Federal Reserve are making rich profits from stimulative measures such as Quantitative Easing (QE).
RELATED TERMS
  1. Central Bank

    The entity responsible for overseeing the monetary system for ...
  2. Volatility Arbitrage

    Trading strategies that attempt to exploit differences between ...
  3. Reserve Assets

    Currency, commodities or other financial capital held by monetary ...
  4. Bank

    A financial institution licensed as a receiver of deposits. There ...
  5. Implied Volatility - IV

    The estimated volatility of a security's price.
  6. Historical Volatility - HV

    The realized volatility of a financial instrument over a given ...
Hot Definitions
  1. Collateral

    Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan ...
  2. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
  3. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  4. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  5. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  6. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
Trading Center