Modelling the Paradox in Stock Markets by Variance Ratio Volatility Estimator that Utilises Extreme Values of Asset Prices

Muneer Shaik and S. Maheswaran

Journal of Emerging Market Finance, 2016, vol. 15, issue 3, 333-361

Abstract: We document the presence of the random walk effect in stock indices and, at the same time, find that the constituent stocks of the indices are excessively volatile. This gives rise to a paradox in stock markets between the behaviour of the stock index and its constituent stocks. We address this phenomenon in this article and reconcile the seemingly contradictory inferences by extending the Binomial Markov Random Walk (BMRW) model. JEL Classification: C15, C58, G15

Keywords: Excess volatility; random walk effect; Markov property of asset prices; variance ratio; Binomial Markov Random Walk model (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:15:y:2016:i:3:p:333-361

DOI: 10.1177/0972652716666464

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