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Volatility and Stock Price Indexes

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  • Kenneth W Clements

    (UWA Business School, The University of Western Australia)

  • H Y Izan

    (UWA Business School, The University of Western Australia)

  • Yihui Lan

    (UWA Business School, The University of Western Australia)

Abstract

The stochastic approach to index numbers has been successfully applied to the estimation of the Consumer Price Index (CPI). One distinct advantage of this approach is that it provides the whole distribution of the index, not simply a point estimate of the rate of inflation. In this paper, we extend the application of the stochastic approach to the estimation of a stock market index. We demonstrate how this approach can be used to identify “redundant stocks” that do not contribute significantly to the overall index. For index tracking purposes, these stocks can be safely excluded.

Suggested Citation

  • Kenneth W Clements & H Y Izan & Yihui Lan, 2011. "Volatility and Stock Price Indexes," Economics Discussion / Working Papers 11-16, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:11-16
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