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Stock market volatility: friend or foe?

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  • Michael Dempsey
  • Abeyratna Gunasekarage
  • Thanh Tan Truong

Abstract

Although a good deal of research effort has been allocated to understanding the time‐series volatility of stock returns – as both market (or systematic) volatility and idiosyncratic (or non‐systematic) volatility – the relationship of such volatility with cross‐sectional volatility or dispersion of outcomes is sparse. Nevertheless, the quest to understand one must involve the quest to understand the other. In this paper, we investigate the dispersion of returns in relation to inter‐temporal volatility, as well as the dynamic of dispersion of returns in generating a portfolio’s return outcome. We find that the level of such dispersion is highly significant for portfolio performance and the notion of risk.

Suggested Citation

  • Michael Dempsey & Abeyratna Gunasekarage & Thanh Tan Truong, 2020. "Stock market volatility: friend or foe?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3477-3492, December.
    • Handle: RePEc:bla:acctfi:v:60:y:2020:i:4:p:3477-3492
    DOI: 10.1111/acfi.12550
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    References listed on IDEAS

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    2. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
    3. Amit Goyal & Pedro Santa‐Clara, 2003. "Idiosyncratic Risk Matters!," Journal of Finance, American Finance Association, vol. 58(3), pages 975-1007, June.
    4. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross‐Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, February.
    5. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
    6. repec:bla:jfinan:v:58:y:2003:i:3:p:975-1008 is not listed on IDEAS
    7. Fernholz, Robert & Shay, Brian, 1982. "Stochastic Portfolio Theory and Stock Market Equilibrium," Journal of Finance, American Finance Association, vol. 37(2), pages 615-624, May.
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