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Movements in Australian Stock Volatility: A Disaggregated Approach

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  • Stephen Sault

    (School of Finance and Applied Statistics, Australian National University, Canberra, ACT, 0200.)

Abstract

This paper applies a disaggregated approach to examine stock volatility at the firm, industry and market level in Australia. We employ the models advanced by Campbell, Lettau, Malkiel and Xu (2001) to carry out this disaggregation, and extend their methodology to incorporate: formal tests of changes in volatility as well as correlations; and the Hodrick-Prescott Filter to identify trends in the series. A trend of decreasing volatility is identified at all levels of aggregation, which is further supported by robust OLS analysis. Results also provide strong support for an increase in correlations between industries over the past 30 years. Coinciding spikes in the volatility and correlation series during periods of market stress has significant implications for portfolio diversification. No support is found for a month-of-the-year effect on volatility or correlations.

Suggested Citation

  • Stephen Sault, 2005. "Movements in Australian Stock Volatility: A Disaggregated Approach," Australian Journal of Management, Australian School of Business, vol. 30(2), pages 303-320, December.
    • Handle: RePEc:sae:ausman:v:30:y:2005:i:2:p:303-320
    DOI: 10.1177/031289620503000207
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    References listed on IDEAS

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    1. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    2. Whitelaw, Robert F, 1994. "Time Variations and Covariations in the Expectation and Volatility of Stock Market Returns," Journal of Finance, American Finance Association, vol. 49(2), pages 515-541, June.
    3. Brown, Philip & Keim, Donald B. & Kleidon, Allan W. & Marsh, Terry A., 1983. "Stock return seasonalities and the tax-loss selling hypothesis : Analysis of the arguments and Australian evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 105-127, June.
    4. Lin, Wen-Ling & Engle, Robert F & Ito, Takatoshi, 1994. "Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 507-538.
    5. Officer, R R, 1973. "The Variability of the Market Factor of the New York Stock Exchange," The Journal of Business, University of Chicago Press, vol. 46(3), pages 434-453, July.
    6. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
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    Cited by:

    1. Zhangxin (Frank) Liu & Michael J. O'Neill, 2018. "Partial moment volatility indices," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(1), pages 195-215, March.
    2. Ali F. Darrat & Bin Li & Omar Benkato, 2011. "The Relationship between Volatility and Expected Returns: Some Evidence for Australia," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 10(1), pages 27-43, April.
    3. Michael J. O'Neill & Zhangxin Liu & Tom Smith, 2017. "Fund Volatility Index using equity market state prices," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(3), pages 837-853, September.

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