Stock market volatility and fractional integration

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)263-273
Journal / PublicationInternational Journal of Finance and Economics
Issue number4
Publication statusPublished - 1996
Externally publishedYes


A fractional integration framework and a relationship between the variability of innovations in real stock prices and real dividends implied by the present value model are used to examine the issue of stock market volatility raised by Shiller (1981) and LeRoy and Porter (1981). It is found that both stock price and dividend data are neither trend stationary nor difference stationary; they are fractionally integrated. The data also show that low interest rates and investors' myopic behaviour only have a limited role in explaining excessive market volatility. On the other hand, the evidence for excess market volatility seems substantial even after controlling for sampling uncertainty.

Research Area(s)

  • ARFIMA model, Long memory, Present value model, Stock price dynamics, Variance bounds