Professional Documents
Culture Documents
Volume 74
Article 12
Issue 5 July 1989
Recommended Citation
Clifford W. Smith Jr., Market Volatility: Causes and Consequences , 74 Cornell L. Rev. 953 (1989)
Available at: http://scholarship.law.cornell.edu/clr/vol74/iss5/12
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MARKET VOLATILITY: CAUSES AND
CONSEQUENCES
I
CAUSES-THE LONG RUN
953
954 CORNELL LA W REVIEW [Vol. 74:953
II
CAUSES-EVIDENCE FROM THE OCTOBER 1987 CRASH
2 Interestingly, oil price volatility has been relatively stable compared to fluctua-
tions in iron and steel prices.
3 G. SCHWERT, supra note 1.
4 See Black, Noise, 41 J. FIN. 529 (1986).
5 This has been forcefully stated in the New York Stock Exchange report on the
October crash.
1989] MARKET VOLATILITY 955
United States market was not the first to decline: non-Japanese Asian markets began the
decline, followed by European markets, then North American markets, and finally Japa-
nese markets.
9 French, Schwert & Stambaugh, Expected Stock Returns and Volatility, 19 J. FIN.
ECON. 3 (1987).
10 Smith & Stulz, The Determinants of Firm's Hedging Policies, 20j. FIN. QUANTITATIVE
ANALYSIS 391 (1985).
11 Smith & Watts, Incentive and Tax Effects of U.S. Executive Compensation Plans, 7 Aus-
TRALIANJ. MGMT. 139 (1982).
12 Cowles, Can Stock Market ForecastersForecast?, I ECONOMETRiCA 309 (1933).
13 Working, A Random Difference Seriesfor Use in the Analysis of Time Series, 29 J. AM.
STAT. Assoc. 11 (1934).
14 Kendall, The Analysis of Economic Time Series, Part 1: Prices, 96J. ROYAL STAT. SOC.
11-25 (1953).
15 Osborne, Periodic Structure in the Brownian Motion of Stock Prices, 10 OPERATIONS
RESEARCH 345 (1962); Osborne, Brownian Motion in the Stock Market, 7 OPERATIONS RE-
SEARCH 145 (1959).
19891 MARKET VOLATILITY 957
IV
PROPOSALS TO "Fix" THE SECURITY MARKETS
20 Brennan, A Theory of Price Limits in Futures Markets, 16J. FIN. EcON. 213 (1986).
960 CORNELL LAW REVIEW [Vol. 74:953
APPENDIX
0.19
0.18
0.17
0.16
0.15
0.14
0.13
0.12
0.11
0.1
O.09
0.08
0.07
0.05
1161 11 . 0111 Ai I
0.05
0.04
0 03 1, u
19111111
0.02
0.01 9MlMInyll 10
1835 1848 1855 185 1878 1895 1898 1906 1918 19S 1935 1945 1956 1956 1975 1985
Fig. 1: Standard deviations of monthly stock returns, 1836-1987 from Schwert 1988.
1989] MARKET VOLATILITY
Fig. 2a
-0.3
-0.4
is 0 72 74 7 78 828 84' 8
Fig. 2b
0.Xj
9.M
Fig. 2d
0.!
Variability of crude petroleum price 0.0
(Vertical axis: Proportionate scale)
-0.I
-8.2
0.22
0
S 0.2
0. 0.18
C
2 0.16
, 0.14
a
0.12
* 0.1 4
0.08
0.06
0.04
0.02-
Fig. 3: Estimates of monthly S&P volatility based on last 20 daily returns from 1984 through 1987
Fig 4: Average daily trading volume on S&P 500 Index futures contracts
(in thousands)