Stock market volatility returned with a vengeance in 2007 and is not going away any time soon.

The rise in volatility was reflected in the kind of year financial markets had, marked by big market swings due to the worsening global credit environment.

'We believe that the markets have shifted to a higher volatility regime,' said Edward Tom, head of equity derivatives strategy at Credit Suisse.

Volatility may remain high in 2008, most analysts say, amid expectations that credit losses concentrated in lower-quality subprime mortgages will broaden to affect many borrowers once thought good credit risks, as well as other types of debt, including credit card and auto loans.

Uncertainty regarding the Federal Reserve's interest rate policy, along with unstable oil prices and a slowdown in the housing sector, could also be drivers of volatility.

'Corporate fundamentals within the current economic environment point to the likelihood that market volatility will trend at a higher baseline level in 2008 than it had prior years,' Tom said.

Deutsche Bank's equity derivatives strategy group, in a December 14 note to clients, predicted volatility is here to stay.

'We believe volatility will remain high in 2008 as the (liquidity) crisis drags on and the macro drivers of volatility, brought on by the recent Fed moves and credit tightening, continue to play out,' it said.

Credit Suisse's Tom noted one reason volatility was so low through the last five years was because hedge funds piled into selling strategies that primarily involved Standard & Poor's 500 .SPX index puts, originally bought to protect their portfolios.

They also sold market volatility at lower levels through variance swaps, a product that expresses a play on actual volatility, he said.

But during the last two subprime meltdowns of 2007, these hedge funds had to unwind their short positions and as a result, much of the trading pressure responsible for lower volatility has been removed, Tom said.

More volatility is not necessarily a harbinger of lower stock prices, analysts said. For example, stocks were very volatile during the bull market in the late 1990s.

Higher volatility also provides opportunities for strategic traders. Investors can now trade volatility products and 'therefore, it is possible to make money on volatility, regardless of stock market direction,' wrote Larry McMillan, president of options research firm McMillan Analysis Corp, in his newsletter 'The Option Strategist.' - Reuters