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A Reexamination of the Causes of Time-Varying Stock Return Volatilities

Published online by Cambridge University Press:  31 March 2010

Chu Zhang
Chu Zhang*
Affiliation:
Department of Finance, Hong Kong University of Science and Technology (HKUST), Clear Water Bay, Kowloon, Hong Kong. czhang@ust.hk
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Abstract

The decline of average stock return volatility in the 2001–2006 period provides an opportunity to test various theories on why the average return volatility increased in the pre-2000 period. This paper compares fundamentals-based theories with trading volume-based theories. While both fundamentals-based and trading volume-based theories explain the upward trend in the average volatility in U.S. stocks from 1976 to 2000 and international stocks from 1990 to 2000, only the fundamentals-based theories explain the volatility pattern for 2001–2006. Much of the variation in the stock return volatilities can be explained by the variation in the earnings volatilities and proxies for growth options, but not by trading-related variables. Evidence also shows that the explanatory power of the fundamentals variables is time varying.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 3 , June 2010 , pp. 663 - 684
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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