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An analysis of stock market volatility

Published online by Cambridge University Press:  06 December 2011

Andrew Adams ,
Seth Armitage  and
Adrian FitzGerald
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Abstract

This paper provides a user-friendly approach to explain how variation in fundamental price-determining variables ‘translates into’ variation in the fundamental value of equities, based on the standard dividend-growth model. The analysis is illustrated with UK data using estimates of real interest rate forecasts and real dividend growth rate forecasts in the past. An important application of this approach is that stock market volatility can be analysed in terms of its component parts. Actual market volatility does not appear to be excessive when compared with the notional volatility implied by changes over time in our estimates of forecast real interest rates and forecast real dividend growth rates.

Keywords

Excess VolatilityRational ValuationDividend-growth ModelEquity Risk PremiumG14
Type
Papers
Information
Annals of Actuarial Science , Volume 6 , Issue 1 , 16 January 2012 , pp. 153 - 170
Copyright
Copyright © Institute and Faculty of Actuaries 2011

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