Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

Tim Bollerslev, Natalia Sizova () and George Tauchen ()
Additional contact information
Natalia Sizova: Department of Economics, Duke University, Postal: Durham NC 27708, USA

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Stock market volatility clusters in time, carries a risk premium, is fractionally integrated, and exhibits asymmetric leverage effects relative to returns. This paper develops a first internally consistent equilibrium based explanation for these longstanding empirical facts. The model is cast in continuous-time and entirely self-contained, involving non-separable recursive preferences. We show that the qualitative theoretical implications from the new model match remarkably well with the distinct shapes and patterns in the sample autocorrelations of the volatility and the volatility risk premium, and the dynamic cross-correlations of the volatility measures with the returns calculated from actual high-frequency intra-day data on the S&P 500 aggregate market and VIX volatility indexes.

Keywords: Equilibrium asset pricing; stochastic volatility; leverage effect; volatility feed-back; option implied volatility; realized volatility; variance risk premium (search for similar items in EconPapers)
JEL-codes: C22 C51 C52 G12 G13 G14 (search for similar items in EconPapers)
Pages: 49
Date: 2009-02-17
New Economics Papers: this item is included in nep-fmk, nep-mst and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://repec.econ.au.dk/repec/creates/rp/09/rp09_05.pdf (application/pdf)

Related works:
Journal Article: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2011)
Working Paper: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2010)
Working Paper: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2009-05

Access Statistics for this paper

More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().