US & World Economies Economic Terms Volatility and Its Five Types How to Measure Price Changes By Kimberly Amadeo Kimberly Amadeo Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. learn about our editorial policies Updated on March 31, 2022 Reviewed by Robert C. Kelly Reviewed by Robert C. Kelly Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article Causes of Price Volatility Stock Volatility Historical Volatility Implied Volatility Market Volatility Definition Volatility is the amount and frequency of price changes. It measures how wildly they swing and how often they move higher or lower. Photo: Spencer Platt / Getty Images Volatility is the amount and frequency of price changes. It measures how wildly they swing and how often they move higher or lower. These can be prices of just about anything. Volatility has been most exhaustively studied, measured, and described in the stock market. Here, the focus has been on the volatility of total return (income received plus price changes, relative to beginning price). When viewed from a historical context, it is known as realized volatility. When estimated on a prospective basis, it is known as implied volatility. Causes of Price Volatility Price volatility is caused by three of the factors that change prices. These three factors work by changing supply and demand. Seasonality The first is seasonality. For example, resort hotel room prices rise in the winter, when people want to get away from the snow. They drop in the summer, when vacationers are content to travel nearby. That is an example of volatility in demand, and prices, caused by regular seasonal changes. Weather Another factor affecting price volatility is the weather. For example, agricultural prices depend on the supply. That depends on the weather being favorable to bountiful crops. Extreme weather, such as hurricanes, can send gas prices soaring by destroying refineries and pipelines. Emotions A third factor is emotions. When traders worry, they aggravate the volatility of whatever they are buying. That's why the prices of commodities are so turbulent. Note The emotional status of traders is one reason why gas prices are often so high. For example, in February 2012, the United States and Europe threatened sanctions against Iran for developing weapons-grade uranium. In retaliation, Iran threatened to close the Straits of Hormuz, potentially restricting oil supply. Even though the supply of oil did not change, traders bid up the price of oil to almost $110 in March. Gas prices rose to $3.87 a gallon. Stock Volatility Investors have developed a measurement of stock volatility called beta. It tells you how well the stock price is correlated with the Standard & Poor’s 500 Index. If it moves perfectly along with the index, the beta will be 1.0. Stocks with betas that are higher than 1.0 are more volatile than the S&P 500. Stocks with a beta less than 1.0 are not as volatile. Economists developed this measurement because the prices of some stocks are highly volatile. That unpredictability makes that stock a more risky investment. As a result, investors want a higher return for the increased uncertainty. Historical Volatility Historical volatility is how much volatility a stock has had over the past 12 months. If the stock price varied widely in the past year, it is more volatile and riskier. It becomes less attractive than a less volatile stock. You might have to hold onto it for a long time before the price returns to where you can sell it for a profit. Of course, if you study the chart and can tell it's at a low point, you might get lucky and be able to sell it when it gets high again. That's called timing the market and it works great when it works. Unfortunately, with a highly volatile stock, it could also go much lower for a long time before it goes up again. You just don't know because it's unpredictable. Implied Volatility Implied volatility describes how much volatility that options traders think the stock will have in the future. You can tell what the implied volatility of a stock is by looking at how much the futures options prices vary. If the options prices start to rise, that means implied volatility is increasing, all other things being equal. Note How can you use this knowledge to your advantage? Buy an option on a stock if you think it will get more volatile. If you're right, the price of the option will increase, and you can sell it for a profit. Sell an option if you think it will get less volatile. Market Volatility Market volatility is the velocity of price changes for any market. That includes commodities, forex, and the stock market. Increased volatility of the stock market is usually a sign that a market top or market bottom is at hand. There is a lot of uncertainty. Bullish traders bid up prices on a good news day, while bearish traders and short-sellers drive prices down on bad news. Note The Volatility Index® or VIX® measures the implied volatility of the S&P 500. The VIX® uses stock index option prices. The Chicago Board Options Exchange created it in 1993. It gauges investor sentiment. The VIX® is also called the fear index. When the VIX® is high, stock prices fall. Often, oil prices also drop as investors worry that global growth will slow. Traders searching for a safe haven bid up gold and Treasury notes. That sends interest rates down. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Cboe. "What Is Volatility?" Accessed August 11, 2020. U.S. Energy Information Administration. "Hurricane Isaac Affects U.S. Gulf Coast Energy Infrastructure." Accessed August 11, 2020. U.S. Energy Information Administration. "Cushing, OK WTI Spot Price FOB." Accessed August 11, 2020. U.S. Energy Information Administration. "Weekly U.S. Regular All Formulations Retail Gasoline Prices." Accessed August 11, 2020. Corporate Finance Institute. "What Is Beta in Finance?" Accessed August 11, 2020. Journal of Economic Perspectives. "The Capital Asset Pricing Model." Accessed August 11, 2020. Cboe. "Volatility Indexes." Accessed August 11, 2020.