ARE VOLATILITY EXPECTATIONS CHARACTERIZED BY REGIME SHIFTS? EVIDENCE FROM IMPLIED VOLATILITY INDICES

Kazuhiko Nishina, Nabil Maghrebi () and Mark Holmes ()
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Kazuhiko Nishina: Graduate School of Economics, Osaka University, Japan
Nabil Maghrebi: Graduate School of Economics, Wakayama University, Japan

No 06-20, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper examines nonlinearities in the dynamics of volatility expectations using benchmarks of implied volatility for the US and Japanese markets. The evidence from Markov regime-switching models suggests that volatility expectations are likely to be governed by regimes featuring a long memory process and significant leverage effects. Market volatility is expected to increase in bear periods and decrease in bull periods. Leverage effects constitute thus an important source of nonlinearities in volatility expectations. There is no evidence of long swings associated with financial crises, which do not have the potential of shifting volatility expectations from one regime to another for long protracted periods.

Keywords: Markov Regime Switching; Implied Volatility Index; Nonlinear Modelling. (search for similar items in EconPapers)
JEL-codes: C32 C51 G13 G15 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2006-07
New Economics Papers: this item is included in nep-cfn, nep-ets, nep-fin, nep-ifn and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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