Movements in Australian Stock Volatility. A Disaggregated Approach

Stephen Sault

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.

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Keywords

VOLATILITY; DISAGGREGATION OF VOLATILITY; CORRELATION; TIME-SERIES TRENDS; DIVERSIFICATION BENEFITS.

Contact Details Stephen Sault School of Finance and Applied Statistics Australian National University, Canberra, ACT, 0200. E-mail: Stephen.Sault@anu.edu.au

The author gratefully acknowledges the helpful suggestions made by Michael Martin and Tom Smith.

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