Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2024-12-23T08:31:03.743Z Has data issue: false hasContentIssue false
  • English
  • Français

An analysis of stock market volatility

Published online by Cambridge University Press:  06 December 2011

Andrew Adams ,
Seth Armitage  and
Adrian FitzGerald
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper provides a user-friendly approach to explain how variation in fundamental price-determining variables ‘translates into’ variation in the fundamental value of equities, based on the standard dividend-growth model. The analysis is illustrated with UK data using estimates of real interest rate forecasts and real dividend growth rate forecasts in the past. An important application of this approach is that stock market volatility can be analysed in terms of its component parts. Actual market volatility does not appear to be excessive when compared with the notional volatility implied by changes over time in our estimates of forecast real interest rates and forecast real dividend growth rates.

Keywords

Excess VolatilityRational ValuationDividend-growth ModelEquity Risk PremiumG14
Type
Papers
Information
Annals of Actuarial Science , Volume 6 , Issue 1 , 16 January 2012 , pp. 153 - 170
Copyright
Copyright © Institute and Faculty of Actuaries 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ackert, L.F., Smith, B.F. (1993). Stock Price Volatility, Ordinary Dividends, and other Cash Flows to Shareholders. Journal of Finance, 48, 1147–1160.CrossRefGoogle Scholar
Arnott, R.D., Bernstein, P.L. (2002). What Risk Premium is “Normal”? Financial Analysts Journal, March/April, pp. 64–85.CrossRefGoogle Scholar
Barclays Capital (2009). Equity-Gilt Study.Google Scholar
Best, P., Byrne, A. (2001). Measuring the Equity Risk Premium. Journal of Asset Management, 1, 245–256.CrossRefGoogle Scholar
Blanchard, O. (1993). Movements in the Equity Premium. Brookings Papers on Economic Activity, 2, 75–138.CrossRefGoogle Scholar
Breedon, F., Chadha, J. (2003). Investigating Excess Returns from Nominal Bonds. Oxford Bulletin of Economics and Statistics, 65, 73–90.CrossRefGoogle Scholar
Campbell, J.Y., Shiller, R.J. (1988). The Dividend-price Ratio and Expectations of Future Dividends and Discount Factors. Review of Financial Studies, 1, 195–228.CrossRefGoogle Scholar
Capie, F., Webber, A. (2005). A Monetary History of the United Kingdom 1870–1982. Routledge.Google Scholar
Chen, L., Zhao, X. (2009). Return Decomposition. Review of Financial Studies, 22, 5213–5249.CrossRefGoogle Scholar
Claus, J., Thomas, J. (2001). Equity Premia as Low as Three Percent? Evidence from Analysts’ Earnings Forecasts and Domestic and International Stock Markets. Journal of Finance, 46, 1629–1666.CrossRefGoogle Scholar
Cochrane, J.H. (1991). Volatility Tests and Efficient Markets. Journal of Monetary Economics, 27, 463–485.CrossRefGoogle Scholar
Fama, E.F., French, K.R. (2002). The Equity Premium. Journal of Finance, 57, 637–659.CrossRefGoogle Scholar
Garcia, J.A., Werner, T. (2010). Inflation Risks and Inflation Risk Premia. European Central Bank working paper no. 1162.CrossRefGoogle Scholar
Ilmanen, A. (2003). Expected Returns on Stocks and Bonds. Journal of Portfolio Management, Winter, 7–27.CrossRefGoogle Scholar
Jagannathan, R., McGratten, E.R., Scherbina, A. (2001). The Declining US Equity Premium. NBER working paper series.Google Scholar
Larrain, B., Yogo, M. (2008). Does Firm Value Move too much To Be Justified by Subsequent Changes in Cash Flow?. Journal of Financial Economics, 87, 200–226.CrossRefGoogle Scholar
Lee, P.J., Wilkie, A.D. (2000). A comparison of stochastic asset models. Proceedings of the 10th AFIR Colloquium, Tromsoe, June, 407–445.Google Scholar
Lettau, M., Ludvigson, S.C. (2005). Expected Returns and Expected Dividend Growth. Journal of Financial Economics, 76, 583–626.CrossRefGoogle Scholar
Shen, P. (1998). How Important is the Inflation Risk Premium? Economic Review of the Federal Reserve Bank of Kansas City, 84, 35–47.Google Scholar
Shiller, R.J. (1981). Do Stock Prices Move Too Much To Be Justified by Subsequent Changes in Dividends? American Economic Review, 71, 421–436.Google Scholar
Shiller, R.J., Beltratti, A.E. (1992). Stock Prices and Bond Yields: Can their Comovements be Explained in Terms of Present Value Models? Journal of Monetary Economics, 30, 25–46.CrossRefGoogle Scholar
Vivian, A. (2007). The UK Equity Premium: 1901–2004. Journal of Business Finance and Accounting, 34, 1496–1527.CrossRefGoogle Scholar
Welch, I., Goyal, A. (2008). A Comprehensive Look at the Empirical Performance of Equity Premium Prediction. Review of Financial Studies, 21, 1455–1508.CrossRefGoogle Scholar
Wilkie, A.D. (1986). A stochastic investment model for actuarial use. Transactions of the Faculty of Actuaries, 39, 341–381.CrossRefGoogle Scholar
Wilkie, A.D. (1995). More on a stochastic asset model for actuarial use. British Actuarial Journal, 1, 777–964.CrossRefGoogle Scholar
Wilkie, A.D., Sahin, S., Cairns, A.J.G., Kleinow, T. (2010). Yet more on a Stochastic Economic Model: Part 1: Updating and Refitting, 1995 to 2009. Annals of Actuarial Science, 5, part 1, 53–99.CrossRefGoogle Scholar