The Distribution of Stock Return Volatility

Torben Andersen, Tim Bollerslev, Francis Diebold and Heiko Ebens

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: We exploit direct model-free measures of daily equity return volatility and correlation obtained from high-frequency intraday transaction prices on individual stocks in the Dow Jones Industrial Average over a five-year period to confirm, solidify and extend existing characterizations of stock return volatility and correlation We find that the unconditional distributions of the variances and covariances for all thirty stocks are leptokurtic and highly skewed to the right, while the logarithmic standard deviations and correlations all appear approximately Gaussian. Moreover, the distributions returns scaled by the realized standard deviations are also Gaussian. Furthermore, the realized logarithmic standard deviations and correlations all show strong dependence and appear to be well described by long-memory processes, consistent with our documentation of remarkably precise scaling laws under temporal aggregation. Our results also show that positive returns have less impact on future variances and correlations than negative returns of the same absolute magnitude, although the economic importance of this asymmetry is minor. Finally, there is strong evidence that equity volatilities and correlations move together, thus diminishing the benefits to diversification when the market is most volatile. By explicitly incorporating each of these stylized facts, our findings set the stage for improved high-dimensional volatility modeling and out-of-sample forecasting, which in turn hold promise for the development of better decision making in practical situations of risk management, portfolio allocation, and asset pricing.

Date: 2000-10
New Economics Papers: this item is included in nep-ets, nep-fin and nep-fmk
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Citations: View citations in EconPapers (31)

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Working Paper: The Distribution of Stock Return Volatility (2000)
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