Cyclicality in Stock Market Volatility and Optimal Portfolio Allocation
In 'STOCK MARKET VOLATILITY', Chapter 10, pp. 195-208, Greg Gregoriou, ed., Chapman & Hall, 2009
Posted: 20 Mar 2010 Last revised: 28 Dec 2016
Date Written: November 2, 2010
Stock market volatility is not constant over time. It exhibits cyclicality, with higher volatility in bear market cycles and lower volatility in bull market cycles. Failure to take into account this cyclicality would lead to sub-optimal portfolio performance and could result in improper risk management. We illustrate in this chapter how to model this cyclicality in market volatility using a simple 2-stage Markov model. The approach is significantly more intuitive and tractable than other models of dynamic market volatility.
Keywords: Conditional Volatility, Risk Management, Portfolio Choice
JEL Classification: G10, G11
Suggested Citation: Suggested Citation