Why Does Stock Market Volatility Change Over Time
Summary (2 min read)
Reistions between Stock Market Volatility and the Volatility of Macroeconomic Variables
- The conditional variance of the stock price at time t-l, Vari(P).
- In fact, several analysts have noted that the volatility of macroeconomic variables changes over time.
- Table 3A contains tests of the incremental ptedictive power of 11 lags of FF1 inflation volatility jrj in a 12th order vector autoregressive (VAR) system for stock volatility, high-grade bond return volatility tht'' and short-term interest volatility 'Crt' , that allows for different monthly intercepts.
It
- Figures 4a, 4b and 4c contain plots of the predicted volatility of the growth rates of industrial production of bank clearings I2dcI) and of liabilities of business failures I2ftI respectively.
- Romer[1986b] argues that data collection procedures cause part of the higher volatility of this series before 1929.
- Both World War I and World War II led to moderate increases in volatility, and volatility was higher during the 1929-1940 period.
- In the mid.l9tF century, the only banks in the sample were in New York City.
Predicted Volatility of Real Growth
- Predicted Volatility of Real Growth increments, currently covering virtually all commercial banks.
- The annual cross correlations between industrial production volatility and stock volatility are positive in Table 2C .
- Table 5 shows that volatility is higher during recessions, since most of the estimates are positive and none is more than 1.5 standard errors below 0. Section 5 addresses this question directly.
4. Stock Volatility and Corporate Profitability
- For the other sample periods, the intercept a0 is less than the slope 01 a result that is inconsistent with all of the leverage models.
- The t-test in the last column of Table 8 tests the hypothesis that the slope equals the intercept.
- The p-value in parentheses is for the two-sided alternative hypothesis.
- Many of the estimates of a1 are reliably g:eater than zero, showing that an increase in the debt/equity ratio leads to an increase in stock return volatility.
- Nevertheless, none of the t-statistics in the last column is greater than .67.
5.2 Stock Market Trading and Volatility
- The analysis of the volatility of bond tetumns, inflation rates, money growth, and teal mactoeconomic variables, along with stock volatility, seeks to decetaine whethet these aggregate volatility measures change together thtough tire.
- Jn most general equilibrium models, fundamental factors such as consumption and production opportunities and preferences would determine all of these parameters (e.g., Abel[1988] or Cenotte and Marah [1987] ).
- Nevertheless, the process of characterizing stylized facts about economic volatility helps define the set of interesting questions, leading to tractable theoretical models.
6.1 Joint Effects of Leverage and Macroeconomic Volatility
- Percent increase in long-term corporate bond return volatility.
- Note that this result is not limited to the post-1979 period when both short and longterm interest rates exhibited unusual volatility.
- Thus, the results in Table 10 suggest that macroeconomic volatility has differential effects on the volatility of corporate stock and bond returns.
6.2 Synthesis
- 2Obviously, this overstates March debits, since the holidays were intended to slow down the rate of financial transactions during this period.
- These series are spliced together using the average ratio of the respective series during 1960.
- Thus, the base data since 1960 are multiplied by viii.
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Cites background or methods from "Why Does Stock Market Volatility Ch..."
...…Boudoukh, Richardson and Whitelaw (1997), Brailsford and Faff (1996), Canina and Figlewski (1993), Dimson and Marsh (1990), Frennberg and Hansson (1995), Figlewski (1997), Heynen and Kat (1994), Jorion (1995), Lamoureux and Lastrapes (1993), Schwert (1989, 1990a) and Schwert and Seguin (1990)....
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...Intraday Returns and Interdaily Volatility Forecast Evaluation The computation of daily return variances from high-frequency intraday returns parallels the use of daily returns in calculating monthly ex-post volatility, as exemplified by Schwert (1989, 1990a) and Schwert and Seguin (1990)....
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