Modelling S&P 100 volatility: The information content of stock returns

Theoretical models that relate volatility to the quantity of information are extended to a multi-asset setting and it is deduced that stock returns may or may not have incremental information when modelling index volatility, depending on the sources of information that move stock prices. The first empirical study that can help resolve this theoretical uncertainty is presented. A detailed analysis of the daily volatility of the S&P 100 index from 1984 to 1998 shows there is some incremental volatility information in the returns from the 100 shares that define the index. This evidence is obtained from ARCH models that incorporate leverage effects, dummy variables for the 1987 crash and aggregate measures of stock return volatility. Significant differences between estimated volatilities are found for various stock measures and sub-periods. (C) 2001 Elsevier Science B.V. All rights reserved.