Analysis of stock market volatility using Shewhart methodology

Abstract

Volatility is a feature of stock markets in free market economies, sometimes excessively. This article explores the relevance of Shewhart's postulates when applied to the analysis of stock market returns. We decompose this volatility into common and special cause volatility using the Shewhart framework. We then show advantages of using these two types of volatility estimates in portfolio selection.

Keywords:

• capital market
• common causes
• Shewhart model
• special causes
• volatility