Survey_FSS_1987

Abstract

We use daily values of the Standard and Poor's (S&P) composite portfolio to estimate the monthly standard deviation of stock market returns from January 1928 through December 1984. This estimator has three advantages over the rolling 12-month standard deviation used by Officer (1973) and by Merton (1980) over his full 1926-78 sample period. (Merton uses daily returns to estimate monthly standard deviations for 1962-1978.) First, by sampling the return process more frequently, we increase the accuracy of the standard deviation estimate for any particular interval. Second, the volatility of stock returns is not constant. We obtain a more precise estimate of the standard deviation for any month by using only returns within that month. Finally. our monthly standard deviation estimates use non-overlapping samples of returns, whereas adjacent rolling l2-month estimators share 11 returns.