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Mean Reversion of Volatility Around Extreme Stock Returns: Evidence from U.S. Stock Indexes

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  • Ling T. He

Abstract

This paper examines mean reversion processes in volatility structure of stock markets after extremely high or low stock returns. The stock market volatility is reflected in three aspects, overall volatility, volatility momentum, and volatility concentration, and they are measured by three basic statistical measures, variance/standard deviation, skewness, and kurtosis, respectively. The results of this study illustrate remarkable reversions in volatility momentum, concentration, and level between periods of preand post-extremely high stock returns. Evidence of this study also supports some strong volatility reversions after extremely negative stock returns. The findings are helpful to investing professionals and financial policy makers to expand their understanding of different aspects of volatility structure and their change cycles. The knowledge may enhance effectiveness of portfolio managers in risk management after busts of stock price bubbles.

Suggested Citation

  • Ling T. He, 2013. "Mean Reversion of Volatility Around Extreme Stock Returns: Evidence from U.S. Stock Indexes," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 7(4), pages 91-101.
    • Handle: RePEc:ibf:ijbfre:v:7:y:2013:i:4:p:91-101
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    Cited by:

    1. Kirti AREKAR & Rinku JAIN, 2017. "Comparative Analysis of Market Volatility in Indian Banking and IT Sectors by using Average Decline Model," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 3, pages 20-25.

    More about this item

    Keywords

    Volatility Reversion; Volatility Momentum; Volatility Concentration; Volatility Level;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

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