level of volatility. this recent decline in volatility has also been seen in the equity indexes of many other countries. but as the chart shows, canada has experienced similarly low levels of stock market volatility in the past, only to see it rebound to the high levels previously experienced. the recent decline in stock market volatility may presage a longer period of reduced volatility - but it's too early to tell. in fact, as kenneth rogoff points out in a recent paper, a decline in short - run business - cycle volatility may not necessarily lead to a decline in asset - price volatility. 4 equity returns, he points out, should depend on long - run expected growth and volatility, and long - run expected volatility - that is to say, uncertainty about long - run growth rates - does not necessarily diminish in proportion to reductions in businesscycle volatility. moreover, lower interest rates and lower risk premiums may make prices for long - term assets, such as stocks and housing, more sensitive to perceived changes in both risk and in the path of future interest rates, thus making these prices more variable. this possibility may, in fact, offset any reduction in financial market volatility that would otherwise stem from reduced macroeconomic volatility. so far, i've focused on the impact that monetary policy and the decline in macroeconomic volatility has had on the volatility of bond markets. but other structural factors in financial markets have also affected financial market volatility. financial market structural factors affecting volatility over the past 25 years, and especially in the past decade, we've seen a good deal of financial and technological innovation in financial markets. this innovation can, over time, help to increase efficiency and reduce volatility. let me mention four aspects that are likely to prove important. rogoff, op. cit. first, innovations in electronic trading and in back - office systems have resulted in lower trading costs and increased price transparency and competition, and, in the end, resulted in greater liquidity. debt and equity markets have seen sharp rises in turnover. increased market liquidity tends to place downward pressure on volatility - prices become less sensitive to large transactions and absorb news more easily. trading in government of canada bonds, to take one example, is at an all - time high, and bid - ask spreads on these bonds are the

there appears to be no reason to sound the alarm on these concerns at this time because of the mitigating factors that i've mentioned. another issue of broad interest relates to investor protection. it concerns the disclosure practices of hedge funds, as well as disclosure related to hedge - fund - based investment products, particularly those sold to retail investors. this important issue is being examined in canada by the provincial securities commissions. overall, then, given the bank's strong interest in promoting the efficiency and stability of the financial system, our focus with regard to hedge funds is the systemic nature of any risk. when it comes to supervision and investor protection, we rely on other bodies. having said that, let me quickly add that it is important for all these agencies to share information effectively, something we strive to do in canada. so, how do hedge funds benefit financial markets? first, it's useful to note that the largely positive influence of hedge funds stems from their sophistication, their size, the diversity of their objectives and strategies, and the instruments they use. hedge funds add to the depth and liquidity of canadian financial markets. and the ability of hedge funds to use leverage and their tendency to actively trade greatly amplifies their presence in the markets, and further adds to liquidity. moreover, the variety of arbitrage strategies and instruments employed by hedge funds not only makes markets more complete, but also makes prices more reflective of underlying fundamentals. these prices in turn provide better signals for others to act upon. and of course to the extent that an investment decision is actually a hedge, risks become more effectively managed. the overall effect of increased liquidity and more effectively managed risk should, in principle, be lower volatility. now, by their very nature, these structural factors would tend to have an enduring impact on the reduction of volatility. cyclical factors, however, may also have played a role in reducing the volatility of equity markets - and possibly fixed - income markets as well - in the past couple of years. this suggests that at least part of the decline may be reversed in the future. as a recent bis paper points out, " to the extent that cyclical factors played a role in containing volatility, some increase should be expected in the event of a [ possible ] slowdown in the global economy. " 5 in plain english, we've seen robust growth in the global economy in recent years. volatility typically rises