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ON ESTIMATING STOCK MARKET VOLATILITY: AN EXPLORATORY APPROACH
Author(s) -
MacDonald John A.,
Shawky Hany A.
Publication year - 1995
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1995.tb00577.x
Subject(s) - volatility (finance) , volatility swap , forward volatility , econometrics , stock exchange , economics , volatility risk premium , financial economics , implied volatility , stock market , variance swap , volatility smile , stochastic volatility , finance , paleontology , horse , biology
Traditional methods of estimating market volatility use daily return observations from a stock index to calculate monthly variance. We break with tradition and estimate stock market volatility using the daily, cross‐sectional standard deviation of returns for all firms trading on the New York Stock Exchange and the American Stock Exchange. We find a significantly positive relation between risk and return. Market volatility is estimated to be about half the volatility level previously reported. The intraday, cross‐sectional market volatility measure provides findings consistent with risk‐return theory.