Square Root of Time Rule and the Indian Stock Market

From: South Asian Journal of Management | Date: October 1, 2006| Author: | Copyright information

Volatility plays an important role in risk management and financial engineering, especially, in the valuation of derivatives. This paper examines the square root of time rule, frequently used in volatility estimation - given a volatility based upon one time unit, using the square root rule to convert it to an equivalent volatility based upon another time unit. The author first analyzes whether the returns are normally distributed or not which is an essential prerequisite for using the square root rule. The Jarque-Bera (JB) test conclusively rejects normal distribution of stock returns, and ...

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