How to Reduce Market Volatility in the Economy

1 Market Volatility Main Reasons Affecting Market Volatility The movement in asset prices is associated with economic, political, and financial factors. The political climate of a country affects the prices of stocks. If a country is experiencing political unrest, such as mass actions or wars, stock market prices will be unstable. Also, unfavorable economic policy will cause a jitter among investors, leading to price instability (AlRimawi & Kaddumi, 2021).

Economic factors that may lead to instability of prices in a stock market are demand and supply, foreign investments, and speculation. The prices in a stock market rely on the demand and supply of financial assets. When supply is high compared to demand, the price falls. On the other hand, when demand is high compared to supply, the prices rise (Al-Rimawi & Kaddumi, 2021). An increase in foreign investments causes high employment levels, which increases GDP. The economic growth resulting from foreign direct investments leads to the development of the securities market, increasing stock market prices (Al-Rimawi & Kaddumi, 2021). Incidentally, market speculation leads to changes in demand and supply. If investors anticipate an increase in prices, they will increase demand, leading to price increases. The opposite is true: when the market speculates a price decrease, the supply will increase, leading to price decreases.

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Inflation and interest rate are financial factors that influence the movement of prices in a securities exchange market. High inflation causes uncertainty, decreases demand, and reduces the price of financial assets (Al-Rimawi & Kaddumi, 2021). When inflation is low, the market speculates high future returns, increasing demand and market prices. The interest rate has an inverse relationship with the prices of financial assets. High-interest rates increase savings, lowering demand for financial assets and prices. When interest rates are low, investors prefer financial assets, increasing demand and market prices.

Reducing the Volatility Authorities can help reduce volatility by maintaining a good political climate. Also, authorities can formulate good investment policies to attract foreign investment, leading to a stable economy and hence stable prices. Also, authorities can stabilize the prices of products to stabilize inflation rates, eventually stabilizing stock markets.

Reflection The assignment enabled me to learn the factors affecting volatility. I learned about the political climate, monetary policy, foreign investments, and speculation. On interest rates, I learned that high-interest rates in the market lower demand for financial assets. I also learned that high inflation lowers demand, hence lowering prices. Incidentally, I learned that to help volatility, and authorities should stabilize the political environment and implement good monetary regulations.

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References Al-Rimawi, M., Kaddumi, T. (2021). Factors Affecting Stock Market Index Volatility: Empirical Study. Journal of Governance & Regulation, 10(3), 169–176, https://doi.org/10.22495/jgrv10i3art15.