Why Does Stock Volatility Change?

Why Does Stock Volatility Change Over Time?

G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research

Journal of Finance, 44 (December 1989) 1115-1153

Winner of 1990 Smith Breeden Distinguished Paper Prize

This paper analyzes the relation of stock volatility with real and nominal macroeconomic volatility, financial leverage, stock trading activity, default risk, and firm profitability using monthly data from 1857-1986. An important fact, previously noted by Officer[1973], is that stock return variability was unusually high during the 1929-1940 Great Depression. Moreover, leverage has a relatively small effect on stock volatility. The amplitude of the fluctuations in aggregate stock volatility is difficult to explain using simple models of stock valuation.
Key words: Stock Market, Volatility, Inflation, Interest Rates, Leverage, Diversification, ARIMA
JEL Classifications: G12, G14, E32
Cited 419 times in the SSCI and SCOPUS through 2008

© Copyright 1989, American Finance Association

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