Volatility and Stock Prices Indexes

Kenneth Clements; H.Y. Izan; Yihui Lan

Volatility and Stock Prices Indexes

Research output: Working paper › Discussion paper

Abstract

The stochastic approach to index numbers has been successfully applied to the estimation of the Consumer Price Index (CPI). One distinct advantage of this approach is that it provides the whole distribution of the index, not simply a point estimate of the rate of inflation. In this paper, we extend the application of the stochastic approach to the estimation of a stock market index. We demonstrate how this approach can be used to identify “redundant stocks” that do not contribute significantly to the overall index. For index tracking purposes, these stocks can be safely excluded.

Original language	English
Publisher	UWA Business School
Publication status	Published - 2011

Publication series

Name	Economics Discussion Papers
No.	16
Volume	11

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11-16.pdfFinal published version, 304 KB

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AB - The stochastic approach to index numbers has been successfully applied to the estimation of the Consumer Price Index (CPI). One distinct advantage of this approach is that it provides the whole distribution of the index, not simply a point estimate of the rate of inflation. In this paper, we extend the application of the stochastic approach to the estimation of a stock market index. We demonstrate how this approach can be used to identify “redundant stocks” that do not contribute significantly to the overall index. For index tracking purposes, these stocks can be safely excluded.

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