Deciphering Volatility - How do stock prices fluctuate

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According to efficient market hypothesis price of a stock represents all the information available to all the buyers and sellers in the market "cumulatively". Therefore, stock price fluctuation happens when the "cumulative" information changes. The rate of change of this information and the intervals between two consecutive information changes is what is fluctuation or commonly known as volatility.This rate of change of information results in the respective change in quantum or amount of change in volatility. The interval between two consecutive changes in information represents the time to propagate the above volatility from sellers with most correct information to buyers with least correct information (or vice-a-versa).This interval between two consecutive changes in information can be segregated into 4 different parts. These 4 parts represent:

Enterprise that the stock represents
Market makers and big finance
Professional traders and market intermediaries
Retail individual investors and amateur traders

Furthermore, each of these categories is divided into sub-categories. These sub-categories represent their class / maturity/ closeness to available information of or for the stock in question, like:

For first category, there are 4 major sub-categories
For second category, there are 7 major sub-categories
For third category, there are 9 major sub-categories

Both, rate of change of information as well as the interval between two consecutive information changes is not constant / static and even project-able / predictable (a durable scientific method is lacking).So, the volatility (i.e. quantum of it per stock) we observe daily is a sum of all the volatility observed by the 3 categories put together (for a specific stock). However, the interval of information propagation is not the same within the 3 categories and as well as between 2 categories (i.e. from last class in category 1 to first class of category 2). Furthermore, relationships between classes belonging to the different categories are also present.Therefore, quantum stock volatility seems to be mathematically random in nature to the naked eye, But it is not.

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Last Updated: 30-05-2024 IST

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