This writing is come up from two questions:
1. Does volatility increase through time?
2. If it does, what’s the reason?
We try to look at JCI, LQ45, and JII:
Standard Deviation
From the graph above, we could see that from 2004 to 2008, the three indices have an upward standard deviation then it start to down in 2009 and 2010. LQ45 is having the highest volatility followed by JII and JCI. From here we know that the 45 most liquid stocks (blue chips) are having high volatility (means high risk). And that’s also explain why JII has a high volatility (it’s because 93% of JII’s stocks are included in LQ45).
If we classified the stocks based on their sector, we can have this composition:
Sectoral Percentage
JCI stocks are dominated by 33% manufacture companies, followed by Trade, Service & Investment, and Finance. Meanwhile LQ45 stocks are dominated by 24% mining companies, followed by Manufacture, and Infrastructure. And for JII, 30% of JII’s stocks are mining companies.
Since we know the Beta for each sector, then we can multiply the above data with the correspond Beta to come up with following table:
Sectoral Beta
Among the three indices, JCI has the lowest beta. This is explained by the stocks composition in JCI which contains 79% of companies with Beta 1. This is also explaining why LQ45 and JII have a higher volatility than JCI.
But why does LQ45 has a higher volatility compared to JII even though it has a lower Beta? This is answered by the total stocks number. LQ45 has more liquid stocks than JII which made LQ45 could have a more transaction volume. Plus 69% of LQ45 stocks are listed in Margin trading stocks (compared to JII which only 63% is available for Margin transaction). This Margin stocks could double the transaction volume thus lead a higher volatility.
To sum it all up, the stocks volatility doesn’t have a strong relationship with time (from historical data) but it has a better relationship with transaction volume (liquidity). This volatility then is enhanced with the stocks’ Beta.
This is also giving us information that the Blue Chip stocks as it represented in LQ45 and JII is the best approach for “market”. Theoretically, “market” is always has Beta = 1. In other words, when we talk about “market” implicitly we talk about Blue Chip stocks.
fakeconomist 