Financial market volatility will rise next year, making life a bit tougher for investors, predicts BCA Research.

The independent research firm is forecasting higher volatility despite a benign macro outlook. “The growing influence of hedge funds, abundant liquidity, robust corporate health and low inflation drove many measures of financial market volatility toward record lows in 2005,” it notes.

“Though the VIX index of implied equity option volatility spiked higher on two occasions this year — following the downgrade of GM corporate debt in April, and again in October when inflation fears gripped financial markets — it closed last week just fractionally above its all-time low,” BCA says.

“Hints that the Fed is close to completing its tightening cycle helped drag the VIX lower last week. However, the lagged effects of the increase in short-term interest rates, as well as a peaking in U.S. corporate financial health, indicate that the VIX will climb next year,” it forecasts. “Greater equity market volatility will make 2006 a more challenging year for investors.”