|  MAR 1989

Velocity of the S&P 500 by Robert A. Wood

Velocity of the S&P 500 by Robert A. Wood Structural changes in security markets resulting from the introduction of derivative instruments, namely options and futures, have been the focus of extensive study in recent years. More recently, the introduction of portfolio insurance and arbitrage trading strategies involving market indices implemented with program trading have been the subject of widespread concern, especially after the events of October 19, 1987. Do derivative instruments, portfolio insurance trading strategies and/or the ability to instantly trigger a large number of trades by computer destabilize markets given their current design? If so, can markets be sensibly re-engineered to accommodate these trading developments? Recent studies have examined the historical trend of volatility and have not found substantial increases in the changing levels of market volatility. As these studies are updated to include 1987 data, the results may be significantly altered, but they still do not touch the issue of speed or velocity of market movements, particularly in light of current trading strategies which could influence the rapidity of market movements.

by Robert A. Wood