Why Does Stock Market Volatility Change Over Time?



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    • William E. Simon Graduate School of Business Administration, University of Rochester, and National Bureau of Economic Research. I received helpful comments from David Backus, Fischer Black, Marie Davidian, Harry DeAngelo, Beni Lauterbach, Ron Masulis, Grant McQueen, Robert Merton, Dan Nelson, Charles Plosser, Paul Seguin, Robert Stambaugh, Jerold Zimmerman, seminar participants at Yale University and at the Universities of Chicago, Michigan, Rochester, and Washington, and three anonymous referees. Ken French and René Stulz deserve special credit for their help. The Bradley Policy Research Center at the University of Rochester provided support for this research.


This paper analyzes the relation of stock volatility with real and nominal macroeconomic volatility, economic activity, financial leverage, and stock trading activity using monthly data from 1857 to 1987. An important fact, previously noted by Officer (1973), is that stock return variability was unusually high during the 1929–1939 Great Depression. While aggregate leverage is significantly correlated with volatility, it explains a relatively small part of the movements in stock volatility. The amplitude of the fluctuations in aggregate stock volatility is difficult to explain using simple models of stock valuation, especially during the Great Depression.