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Stock Market Volatility and Fractional Integration


  • Cheung, Yin-Wong


A fractional integration framework and a relationship between the variability of innovations in real stock prices and real dividends implied by the present value model are used to examine the issue of stock market volatility raised by Shiller (1981) and LeRoy and Porter (1981). It is found that both stock price and dividend data are neither trend stationary nor difference stationary; they are fractionally integrated. The data also show that low interest rates and investors' myopic behaviour only have a limited role in explaining excessive market volatility. On the other hand, the evidence for excess market volatility seems substantial even after controlling for sampling uncertainty. Copyright @ 1996 by John Wiley & Sons, Ltd. All rights reserved.

Suggested Citation

  • Cheung, Yin-Wong, 1996. "Stock Market Volatility and Fractional Integration," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(4), pages 263-273, October.
  • Handle: RePEc:ijf:ijfiec:v:1:y:1996:i:4:p:263-73

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    References listed on IDEAS

    1. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 61-82, Suppl. De.
    2. Engel, Charles, 1994. "Can the Markov switching model forecast exchange rates?," Journal of International Economics, Elsevier, vol. 36(1-2), pages 151-165, February.
    3. Alain DeSerres & Alain Guay & Pierre St-Amant, 1995. "Estimating and Projecting Potential Output Using Structural VAR Methodology," Macroeconomics 9504003, EconWPA.
    4. Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May.
    5. Robert A. Amano & Tony S. Wirjanto, "undated". "An Empirical Investigation into Government Spending and Private Sector Behaviour," Staff Working Papers 94-8, Bank of Canada.
    6. Amano, Robert A. & van Norden, Simon, 1995. "Terms of trade and real exchange rates: the Canadian evidence," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 83-104, February.
    7. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
    8. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. " Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-1764, December.
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