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A Reexamination of the Causes of Time-Varying Stock Return Volatilities

Chu Zhang
The Journal of Financial and Quantitative Analysis
Vol. 45, No. 3 (JUNE 2010), pp. 663-684
Stable URL: http://www.jstor.org/stable/40930472
Page Count: 22
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A Reexamination of the Causes of Time-Varying Stock Return Volatilities
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Abstract

The decline of average stock return volatility in the 2001-2006 period provides an opportunity to test various theories on why the average return volatility increased in the pre-2000 period. This paper compares fundamentals-based theories with trading volume-based theories. While both fundamentals-based and trading volume-based theories explain the upward trend in the average volatility in U.S. stocks from 1976 to 2000 and international stocks from 1990 to 2000, only the fundamentals-based theories explain the volatility pattern for 2001-2006. Much of the variation in the stock return volatilities can be explained by the variation in the earnings volatilities and proxies for growth options, but not by tradingrelated variables. Evidence also shows that the explanatory power of the fundamentals variables is time varying.

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