The Executive Education and Center for Leadership and Change Management programs at the Wharton School at the University of Pennsylvania continue to generate an abundance of valuable material for executives in need of cutting edge thinking. Revelations in research by Jeff Jaffe, Associate Professor of Finance, offer an excellent case in point.

When you’re developing investment strategies or managing portfolios, for yourself or your clients, volatility matters. It can influence your choices of assets, leading to what might be unwise decisions. But, says Wharton associate professor of finance Jeff Jaffe, there can be a split between what feels like volatility on the ground and actual volatility in the market.

“Reading the news, it looks like there’s currently a lot of volatility,” he explains, citing the global rise of populism, unpredictable world leaders, acts of terrorism, and new threats of war. “Maybe not as much as in 2008 at the start of the Great Recession,” says Jaffe, “but it seems high. When you look at the market, however, there is very little volatility. There’s a real disconnect.”

Jaffe recently spoke about this disconnect with participants in the week-long Investment Strategies and Portfolio Management program. He showed them the CBOE Volatility Index (or VIX Index), which is widely considered the world’s leading barometer of market volatility, forecasting volatility for the S&P 500 index for a month ahead. It clearly indicates a relatively stable market.

But Jaffe says it’s important to note that there is historical precedent for relatively low volatility in what otherwise appear to be volatile times. “During the 1940s, with the bombing of Pearl Harbor and our involvement in World War II, the standard deviation of stock returns was moderate. And when you look at the last half of 2009, no one said, ‘we are back at near-full employment’ or ‘GDP growth is back to normal.’ Economic indicators were still bad. But volatility as reflected in the VIX index was back to normal.”

His interpretation of market stability at that time involves the flow of bad news. “In September 2008, all we heard was that the country was going down the tubes. That news caused the stock market to fall. Then, the news flowed at a normal rate with the economy at a lower level. That’s not really surprising, because volatility is mean reverting — it doesn’t stay high or low forever. But what is surprising is that volatility stays so low for so long during what feels like tumultuous times.”

When we consider past data from most of American history, the two most volatile periods in terms of standard deviation of stock returns were the Civil War and the Great Depression. “That makes perfect sense,” says Jaffe. “We can assume that there was a high perception of volatility on the ground during both of these periods. During the Civil War, there was fear in many states about whether they would be part of the same country at the end of the war. During the Great Depression, many people rightly feared losing their jobs as the unemployment rate reached over 20 percent. There was a direct correlation during those times between the news and the market’s volatility.”

“What we are living through day-to-day is nothing like the Depression or the Civil War. It’s also nothing like 2008. But we’re still below the 90-year annualized standard deviation average of about 20 percent,” says Jaffe. “That doesn’t seem to fit with today’s headlines.”

For the executives in Investment Strategies and Portfolio Management, the disconnect between the perception of volatility and how the market is behaving presents an interesting challenge. It’s easy to translate current events into impulsive investment decisions. But understanding how the market has behaved in the past can help; it’s clear that every tempestuous news cycle doesn’t necessarily lead to a downturn.

“Don’t make the mistake of equating volatility on the ground with volatility in the market,” says Jaffe. “The two are not the same. We might not be able to explain it, but often times there is a disconnect.”

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