What is volatility clustering?

What is volatility clustering?

Volatility clustering is a frequently observed financial time series phenomena where periods of high volatility cluster together as do periods of low volatility. For e.g, refer the following graph which displays the return of Dow Jones index between 1991 - 2003. One can clearly observe from the graph that large fluctuations in returns tend to be followed by similar large fluctuations (1997-98) while small fluctuations in returns tend to be followed by similar small fluctuations(1993-95). This phenomena suggests that volatility itself is volatile.

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Reference
http://pagesperso-orange.fr/pgreenfinch/bfglo/bfglo.volatility.htm

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