Abstract
The volatility of an asset price is modelled as a function of the volatility of an information signal, real interest rates and inflation expectations. Volatility depends on the duration of cash flows, and the degree to which cash flows are indexed to real rates and inflation. The model is applied to determine asset betas, the volatility of the futures prices of assets and the volatility of equity prices.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Boquist, J.A., B.A. Racette, and G. Schlarbaum. “Duration and Risk Assessment of Bonds and Common Stocks.”Journal of Finance 1360–1365 (December 1975).
Casabona, P.A. and A. Vora. “The Bias of Conventional Risk Premiums in Empirical Tests of the Capital Asset Pricing Model.”Financial Management 90–96 (Summer 1982).
Copeland, L.S. and R.C. Stapleton. “The Duration and Volatility of Spot and Futures Prices.”Review of Futures Markets (forthcoming).
Cox, J.C., J.E. Ingersoll, and S.A. Ross. “Duration and the Measurement of Basis Risk.”Journal of Business 52(1), 51–61 (1979).
Cox, J.C., J.E. Ingersoll, and S.A. Ross. “The Relationship between Forward Prices and Futures Prices.”Journal of Financial Economics 9, 321–346 (1981).
Fama, E.F. “Short Term Interest Rates as Predictors of Inflation.”American Economic Review 65, 269–282 (1975).
Fama, E.F. and K.R. French. “The Cross-Section of Expected Stock Returns.”Journal of Finance 47(2), 426–465 (1992).
Harrison, J.M. and D.M. Kreps. “Martingales and Arbitrage in Securities Markets.”Journal of Economic Theory 20, 381–408 (1979).
Jacobs, B.I. and K.N. Levy. “Disentangling Equity Return Regularities: New Insights and Investment Opportunities.”Financial Analysts Journal 18–43 (May/June 1988).
Lanstein, R. and W.F. Sharpe. “Duration and Systematic Risk.”Journal of Financial and Quantitative Analysis 653–668 (November 1978).
Leibowitz, M.L. “Total Portfolio Duration: A New Perspective on Asset Allocation.”Financial Analysts Journal 18–29 (September/October 1986).
Livingston, M. “Duration and Risk Assessment for Bonds and Common Stocks: A Note.”Journal of Finance 33(1), 283–295 (1978).
Macaulay, F.R.Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the US Since 1856. New York: 1938.
Ross, S.A. “Information and Volatility: The No-Arbitrage Approach to Timing and Resolution Uncertainty.”Journal of Finance 44, 1–17 (1989).
Schwert, G.W. “Why Does Stock Market Volatility Change over Time.”Journal of Finance 44(5), 1115–1153 (December 1989).
Shiller. “Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?”American Economic Review 71, 291–304 (1981).
Stuart, A. and J.K. Ord.Kendall's Advanced Theory of Statistics, Vol. 1, 5th ed. London: Charles Griffin and Co., 1987.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Copeland, L.S., Stapleton, R.C. Information, interest rates, and the volatility of asset prices. Rev Quant Finan Acc 3, 99–115 (1993). https://doi.org/10.1007/BF02408416
Issue Date:
DOI: https://doi.org/10.1007/BF02408416