, and runs the risk of just adding noise or sowing confusion. hence an explanation for the low volatility could be the assumption of a stable macro environment together with an understanding of central bank reaction function, rather than the 7 / 14 bis central bankers'speeches effect of forward guidance per se. the low level of implied volatility could also reflect greater investor willingness to take on financial market risk. this is consistent with measures that suggest demand for derivatives which protect against uncertainty has declined. it is also consistent with other indicators of increased investor appetite for financial risks, such as the narrowing of credit spreads. this increased risk appetite may in part reflect the low yield environment of recent years ; protection against uncertainty is not costless, and so detracts from already low returns. there has also been an increased interest in the selling of volatility - linked derivatives by investors to generate additional returns in the low yield environment in recent years. effectively, some market participants were selling insurance against volatility. they earned the premium income from those buying the insurance whilever volatility remains lower than expected, but they have to pay out when volatility rises. in recent years, there was a steady stream of premium income to be had. ( this is even more so if i were a risk neutral seller of insurance to a risk - averse buyer, in which case, the expected value of the insurance should be positive. ) but the payout, when it came, was large. i will come back to this shortly in discussing recent developments. this reduced demand for volatility insurance combined with increased supply saw the price fall. such an extended period of low volatility is not unprecedented, although the recent episode was among the longest in several decades ( graph 6 ). prolonged periods of low volatility have sometimes been followed by sudden increases in volatility – although generally not to especially high levels – and a repricing of financial assets. a rise in volatility could be associated with a reassessment of economic conditions and expected policy settings, in which case, one might not expect the rise to last that long. in contrast, a structural shift higher in volatility requires an 8 / 14 bis central bankers'speeches increase in uncertainty about future outcomes, rather than simply a reassessment of them. but just as i find it puzzling that term premia in fixed income markets have been so low for so long, i similarly find it puzzling that

glenn stevens : interesting times address by mr glenn stevens, governor of the reserve bank of australia, to the australian business economists annual dinner, sydney, 9 december 2008. * * * it is a pleasure once again to address the australian business economists. it was to this group that i gave my first speech as governor, in october 2006. tonight is my 23rd speech since then. between the two occasions, quite a lot has changed, globally and domestically ( though i doubt the speeches have become any more exciting ). many people have said to me recently that the times are “ interesting ”. my response has been that they are, perhaps, a little too interesting. i need not remind this audience of the international financial turmoil through which we have lived over the past almost year and a half, nor of the intensity of the events since mid september this year, in particular. i do not know anyone who predicted this course of events. this should give us cause to reflect on how hard a job it is to make genuinely useful forecasts. what we have seen is truly a “ tail ” outcome – the kind of outcome that the routine forecasting process never predicts. but it has occurred, it has implications, and so we must reflect on it. in that spirit, i shall set out a few features of this episode that make it “ interesting ”. the most obvious one is the prominence of financial events and particularly financial sector impairment in key countries. there have been other episodes where individual financial institutions or sectors, or even the whole banking systems of small countries, have needed recapitalisation. but the scale of capital needed, the number of countries where it is needed and the extent of counterparty risk aversion because of concerns over solvency have been outside the range of experience of the past half century. in the near term, financial stress brings the obvious concern about the ability of the financial system to provide credit to the economies in question. as one measure of this concern, the number of loans approved for housing in the united kingdom in october was 65 per cent lower than a year earlier, and about 50 per cent lower than during the downturn of the early 1990s. the immediate need is to keep ample liquidity, strengthen banks ’ balance sheets by adding capital and to help confidence, including by lending the strength of the sovereign ’ s credit rating where necessary. all this has been occurring. what may still be needed internationally is attention to the remaining problem assets, since if their prices continue to decline