IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

The causes of stock market volatility in Australia

Listed author(s):
  • Colm Kearney
  • Kevin Daly

The paper examines the extent to which the conditional volatility of stock market returns in a small, internationally integrated stock market are related to the conditional volatility of financial and business cycle variables. It employs a low frequency monthly dataset for Australia including stock market returns, interest rates, inflation, the money supply, industrial production and the current account deficit over the period from July 1972 to January 1994. A novel feature of the analysis is the estimation strategy employed to overcome the generated regressors problem which pervades some recent related research. Specifically, the procedure of employing a two-stage estimation process to first estimate conditional volatilities and then model their interrelationships yields inefficient estimates, introduces bias into a number of diagnostic test statistics and generates potentially invalid inferences. This problem is overcome in the current paper by jointly estimating the equation for the conditional volatility of stock market returns together with the equations determining the conditional volatilities of all variables included in the model using the generalized least squares (GLS) estimation procedure together with the Hendry general-to-specific modelling strategy. Among the most important determinants of the conditional volatility of the Australian stock market are found to be the conditional volatilities of inflation and interest rates which are directly associated with stock market volatility, and the conditional volatilities of industrial production, the current account deficit and the money supply which are indirectly associated with stock market conditional volatility. Among these variables, the strongest effect is found to be from the conditional volatility of the money supply to the conditional volatility of the stock market. By contrast, no evidence is found of volatility spillover from the foreign exchange market to the stock market in Australia.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 8 (1998)
Issue (Month): 6 ()
Pages: 597-605

in new window

Handle: RePEc:taf:apfiec:v:8:y:1998:i:6:p:597-605
DOI: 10.1080/096031098332637
Contact details of provider: Web page:

Order Information: Web:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:8:y:1998:i:6:p:597-605. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.