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Stock Market Volatility: Ten Years After the Crash

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  • G. William Schwert

Abstract

Stock volatility has been unusually low since the 1987 stock market crash. The large increase in stock prices since 1987 means that many days during 1996 and 1997 experienced near record changes in the Dow Jones Industrial Average, even though the volatility of stock returns has not been high by historical standards. I compare volatility of returns to U.S. stock indexes at monthly, daily, and intraday intervals, and I also show the volatility of returns to stock indexes implied by traded options contracts. Finally, I compare the volatility of U.S. stock market returns with the volatility of returns to stock markets in the United Kingdom Australia, and Canada. All of the evidence leads to the conclusion that volatility has been very low in the decade since the 1987 crash. The mini-crash of October 27 to reevaluate the current system of circuit breakers so that they are triggered less easily. Part of the problem is caused by trigger points that are expressed as absolute changes in market indexes.

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Bibliographic Info

Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 97-51.

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Date of creation: Oct 1997
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Handle: RePEc:wop:pennin:97-51

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References

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  1. Robert J. Barro, 1989. "The Stock Market and Investment," NBER Working Papers 2925, National Bureau of Economic Research, Inc.
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Cited by:
  1. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 188-199.
  2. Engle, Robert F. & Gallo, Giampiero M., 2006. "A multiple indicators model for volatility using intra-daily data," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 3-27.
  3. Barndorff-Nielsen, Ole E. & Graversen, Svend Erik & Jacod, Jean & Shephard, Neil, 2006. "Limit Theorems For Bipower Variation In Financial Econometrics," Econometric Theory, Cambridge University Press, vol. 22(04), pages 677-719, August.
  4. Neil Shephard & Ole E. Barndorff-Nielsen, 2002. "Estimating quadratic variation using realised variance," Economics Series Working Papers 2001-W20, University of Oxford, Department of Economics.
  5. Smith, Peter N & Sorensen, Steffen & Wickens, Michael R., 2009. "The Equity Premium and the Business Cycle: the Role of Demand and Supply Shocks," CEPR Discussion Papers 7227, C.E.P.R. Discussion Papers.
  6. Vortelinos, Dimitrios I. & Thomakos, Dimitrios D., 2013. "Nonparametric realized volatility estimation in the international equity markets," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 34-45.
  7. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999. "(Understanding, Optimizing, Using and Forecasting) Realized Volatility and Correlation," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-061, New York University, Leonard N. Stern School of Business-.
  8. Ole E. Barndorff-Nielsen & Neil Shephard, 2005. "Variation, jumps, market frictions and high frequency data in financial econometrics," Economics Papers 2005-W16, Economics Group, Nuffield College, University of Oxford.
  9. Gamini Premaratne & Lakshmi Bala, 2004. "Stock Market Volatility: Examining North America, Europe and Asia," Econometric Society 2004 Far Eastern Meetings 479, Econometric Society.
  10. Costa, Jose Carlos & Mata, Maria Eugenia & Justino, David, 2009. "Portuguese Average Cost Of Capital," FEUNL Working Paper Series wp543, Universidade Nova de Lisboa, Faculdade de Economia.
  11. Li, Tao, 2007. "Heterogeneous beliefs, asset prices, and volatility in a pure exchange economy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1697-1727, May.
  12. Ole E. Barndorff-Nielsen & Neil Shephard, 2001. "Estimating quadratic variation using realised volatility," Economics Papers 2001-W20, Economics Group, Nuffield College, University of Oxford, revised 01 Nov 2001.

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