Stock returns and volatility: An empirical study of the UK stock market

Abstract Attempts to quantify the relationship between stock returns and volatility have produced conflicting conclusions in recent U.S. studies. Our paper examines this issue in the U.K. context for the first time using daily, weekly, fortnightly and monthly returns on the Financial Times All Share Index from January 1965 to December 1989. Volatility estimates are obtained from monthly sample variances and ARCH models. Expected returns are shown to have had a positive, though not statistically significant, relationship with expected volatility. The relationship between the unexpected components of the returns and volatility series is less clear: we find evidence for a negative relationship but only when volatility expectations are represented by standard deviations.

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