On Estimating Stock Market Volatility: An Exploratory Approach

Traditional methods of estimating market volatility use daily return observations from a stock index to calculate monthly variance. We break with traditional and estimate stock market volatility using the daily, cross-sectional standard deviation of returns for all firms trading on the New York Stock Exchange and the American Stock Exchange. We find a significantly positive relation between risk and return. Market volatility is estimated to be about half the volatility level previously reported. The intraday, cross-sectional market volatility measure provides findings consistent with risk-return theory.