Stivers, Christopher T.: Evidence on the Economics of Equity Return Volatility Clustering
World Conference Econometric Society, 2000, Seattle

Robert A. Connolly, University of North Carolina - Chapel Hill
Christopher T. Stivers, University of Georgia
Evidence on the Economics of Equity Return Volatility Clustering
Session: C-13-24  Wednesday 16 August 2000  by Stivers, Christopher T.
The underlying economic sources of volatility clustering in asset returns remain a puzzle in financial economics. Using daily equity returns, we study variation in the volatility relation between the conditional variance of individual firm returns and yesterday's market return shock. We find a number of regularities in this market-to-firm volatility relation. (1) It decreases following macroeconomic news announcements; (2) it does not change systematically during the high-news months when firms announce quarterly earnings; and (3) it increases substantially with our measures of dispersion-in-beliefs across traders about the market's common-factor signal. Our evidence suggests that volatility-clustering is a natural result of a price formation process with heterogeneous beliefs across traders, and that volatility clustering is not attributable to an autocorrelated news-generation process around public information such as macroeconomic news releases or firms' earnings releases. We find consistent results in our sample of large-capitalization firms in Japan and the U.K., which suggests a generality of our results and bolsters our economic interpretation.
Submitted paper full-text in .pdf

File created by Jurgen Doornik with eswc2000.ox on 2-01-2001