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The Effect of Volatility Changes on the Level of Stock Prices and Subsequent Expected Returns
Author(s) -
HAUGEN ROBERT A.,
TALMOR ELI,
TOROUS WALTER N.
Publication year - 1991
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1991.tb03774.x
Subject(s) - volatility (finance) , economics , econometrics , forward volatility , volatility risk premium , stock (firearms) , volatility swap , volatility smile , implied volatility , financial economics , monetary economics , mechanical engineering , engineering
This paper estimates volatility changes in daily returns to the Dow Jones Industrial Average over the sample period 1897 through 1988. This allows a direct investigation of the reaction of the level of stock prices and subsequent expected returns to these estimated changes in volatility. We provide empirical evidence consistent with relatively large and systematic revisions in stock prices and subsequent expected returns to volatility changes. However, there appears to be an asymmetry in the market's reaction to volatility increases as opposed to volatility decreases. A majority of our volatility changes cannot be associated with the release of significant economic information.