S&P 500 stock return volatilities are compared to the volatilities of a matched set of stocks, after controlling for cross-sectional differences in firm attributes known to affect volatility. No significant difference in volatility is observed between 1975 and 1983 -- before the start of trade in index futures and index options. Since then, S&P 500 stocks have been relatively more volatile. The difference is statistically, but not economically significant. The relative increase occurs primarily in daily returns and only to a lesser extent in longer interval returns. Other factors besides the start of derivative trading could be responsible for the small increase in volatility.
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Last revised 8/5/96.