Market Volatility can be Predictable
Market volatility, often measured as the standard deviation of stock market returns, varies from low levels during calm economic times to high levels during periods of great economic uncertainty or market distress. Volatility can be predicted even in an informationally efficient market. For example, a corporation’s stock should be expected to exhibit higher levels of volatility surrounding the release of its earnings report than at other times. A clear way to differentiate between patterns that are informationally efficient and those that are not is to ask this question: does the pattern allow a trader with knowledge of that pattern a higher likelihood of earning superior risk-adjusted returns relative to a trader without knowledge of that pattern? If the answer is “yes” then the market is informationally inefficient with respect to information regarding that pattern.