ON THE RELATIONSHIP BETWEEN MARKET VOLATILITY AND THE DOW AND STANDARD AND POOR’S 500 INDEXES

Morsheda Hassan
Grambling State University

Raja Nassar
Louisiana Tech University

Terence Bradford
Grambling State University

ABSTRACT

This study used a time series analytical approach to investigate the relationships between
market volatility and the Dow Jones Industrial Average (DOW) and the S&P 500 indexes. Index
volatility was determined from estimates of the index standard deviation using the autoregressive
conditional heteroscedasticity (ARCH (1)) model. The study covered three periods, the first quarter
of 1970 (1970-1) to the third quarter of 2018 (2018-3), 1990-1 to 2018-1, and 1997-1 to 2018-3.
For all periods, the results of the time series analysis showed that index volatility had a significant
negative relationship with the returns on the DOW index and the S&P 500 index. It is shown that
this negative relationship is not a direct cause-and-effect. It is caused rather by the GDP having a
positive effect on the Dow and S&P 500 indexes and a negative effect on volatility. These results
are new to the literature concerning market returns and volatility

Keywords: Market returns, market volatility, DOW index, S&P 500 index, GDP