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Shaikh A. Hamid, Tej S. Dhakar: Anamolous Behavior of the Volatility of Nasdaq
Composite Index: 1971 To 2017

I. INTRODUCTION AND LITERA TURE SURVEY

Existence of market anomalies have been explored for various assets based on their
returns. Understanding of volatility is crucial for traders, analysts, and policy-makers.

At least two studies have looked at the day-of the-week effect in the volatility of stock
markets (Berument and Klymaz [2001] and Klymaz and Berument [2003]). Cochran,
Heck, and Shaffer (2003) explore volatility of world equity markets. Gerlach (2005)
analyze effect of imperfect information on stock market volatility. Jones, Walker and
Wilson (2004) look at extreme day measures to analyze stock market volatility. Kim,
Morley and Nelson (2004) explore relationship between volatility and equity
premium. Du and Shang-Jin (2004) analyze if insider trading raises volatility. Possibly
no study has looked at the existence of month effect in terms of volatilities – specially
in the NASDAQ Composite Index. If the markets are highly efficient, we would not
expect to see significant month-to-month differences in volatilities. We intend to
contribute to the formidable literature on market anomalies by exploring month-to-
month differences in volatilities in the Nasdaq Composite Index – one of the most
popular stock indexes in the world. We also want to explore if volatilities have
increased in recent decades as is the popular perception.

We define volatility in terms of mean absolute percent change (MAPC) rather than
standard deviation. We use the percent change as it is not affected by the scale given
that the NASDAQ Composite Index has increased manifold since inception.
Secondly, MAPC is preferable since the standard deviation tends to give more weight
to larger % changes than the smaller percentage changes. Lastly, the investors are
concerned by the percentage changes as the returns from the stock market correlate
more directly with the percentage changes.

We explore volatility of the NASDAQ Composite Index from the inception in
February 1971 to December 2017 principally from two perspectives: (a) if the MAPC
of the monthly percentage changes for a month was different from the MAPC of the
remaining months of the year, and (b) if the MAPC based on daily percentage changes
for a month was different from the MAPC of the remaining months of the year. The
findings of the study will guide practicing analysts to achieve better timing for
investing in NASDAQ stocks.

The next section describes the methodology used, description of data and descriptive
statistics, analysis of results, and finally we summarize and conclude.
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