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Modelling the Paradox in Stock Markets by Variance Ratio Volatility Estimator that Utilises Extreme Values of Asset Prices

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  • Muneer Shaik
  • S. Maheswaran

Abstract

We document the presence of the random walk effect in stock indices and, at the same time, find that the constituent stocks of the indices are excessively volatile. This gives rise to a paradox in stock markets between the behaviour of the stock index and its constituent stocks. We address this phenomenon in this article and reconcile the seemingly contradictory inferences by extending the Binomial Markov Random Walk (BMRW) model. JEL Classification: C15, C58, G15

Suggested Citation

  • Muneer Shaik & S. Maheswaran, 2016. "Modelling the Paradox in Stock Markets by Variance Ratio Volatility Estimator that Utilises Extreme Values of Asset Prices," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 15(3), pages 333-361, December.
    • Handle: RePEc:sae:emffin:v:15:y:2016:i:3:p:333-361
    DOI: 10.1177/0972652716666464
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    References listed on IDEAS

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    More about this item

    Keywords

    Excess volatility; random walk effect; Markov property of asset prices; variance ratio; Binomial Markov Random Walk model;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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