We should expect volatility:
It is important to remember how well-functioning capital
markets work and what prices reflect; prices reflect the
aggregate expectations of market participants.
Risk aversion, investors’ tastes and preferences, and expectations
about future profits are among the many inputs that affect
aggregate expectations. We should expect these inputs to
vary day-to-day. This implies we should expect aggregate
expectations to vary from day-to-day. Markets adapt to
changing expectations and new information. As a result, we
expect prices, as well as the level of volatility, to fluctuate.
It is interesting to think of the alternative: If prices did not
adjust and remained constant, we would be concerned that
markets were not functioning properly.
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