Stock Market Volatility and Economic Factors

This paper examines the ability of rational economic factors to explain stock market volatility. A simple model of the economy under uncertainty identifies four determinants of stock market volatility: uncertainty about the price level, the riskless rate of interest, the risk premium on equity and t...

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Bibliographic Details
Published inReview of quantitative finance and accounting Vol. 17; no. 1; pp. 5 - 26
Main Authors Binder, John J, Merges, Matthias J
Format Journal Article
LanguageEnglish
Published New York Springer Nature B.V 01.07.2001
Subjects
Accounting
Cash flow
Demand curves
Economic models
Equity
finance
Forecasting
Forecasts
Great Depression
Industrial production
Price levels
profit maximization
Profits
Random variables
Risk
risk premium
Risk premiums
Securities markets
Standard deviation
Stock exchange
Stock exchanges
stock market
Stock market indexes
Studies
Time series
Uncertainty
Volatility
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Summary:This paper examines the ability of rational economic factors to explain stock market volatility. A simple model of the economy under uncertainty identifies four determinants of stock market volatility: uncertainty about the price level, the riskless rate of interest, the risk premium on equity and the ratio of expected profits to expected revenues. In initial tests these variables have significant explanatory power and account for over 50 per cent of the variation in market volatility from 1929 to 1989. When the regression coefficients are allowed to vary over time using cluster regression, the four factors explain over 90 per cent of the variation in market volatility. The results are useful in explaining the past behavior of stock market volatility and in forecasting future volatility. [PUBLICATION ABSTRACTS]
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0924-865X
1573-7179
DOI:10.1023/A:1011207919894