paper

The statistical properties of the volatility of price fluctuations

arXiv:cond-mat/9903369 · doi:10.1103/PhysRevE.60.1390

Abstract

We study the statistical properties of volatility---a measure of how much the market is likely to fluctuate. We estimate the volatility by the local average of the absolute price changes. We analyze (a) the S&P 500 stock index for the 13-year period Jan 1984 to Dec 1996 and (b) the market capitalizations of the largest 500 companies registered in the Trades and Quotes data base, documenting all trades for all the securities listed in the three major stock exchanges in the US for the 2-year period Jan 1994 to Dec 1995. For the S&P 500 index, the probability density function of the volatility can be fit with a log-normal form in the center. However, the asymptotic behavior is better described by a power-law distribution characterized by an exponent 1 + μ\approx 4. For individual companies, we find a power law asymptotic behavior of the probability distribution of volatility with exponent 1 + μ\approx 4, similar to the S&P 500 index. In addition, we find that the volatility distribution scales for a range of time intervals. Further, we study the correlation function of the volatility and find power law decay with long persistence for the S&P 500 index and the individual companies with a crossover at approximately 1.5 days. To quantify the power-law correlations, we apply power spectrum analysis and a recently-developed modified root-mean-square analysis, termed detrended fluctuation analysis (DFA). For the S&P 500 index, DFA estimates for the exponents characterizing the power law correlations are α_1=0.66 for short time scales (within \approx 1.5 days) and α_2=0.93 for longer time scales (up to a year). For individual companies, we find α_1=0.60 and α_2=0.74, respectively. The power spectrum gives consistent estimates of the two power-law exponents.

34 pages (Revtex pre-print format), 17 figures, 47 references; submitted, Feb 22 1999. Email: [email protected],[email protected]

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