How Do Volatility and Return Series Interact?

Arif Orçun Söylemez

MPRA Paper from University Library of Munich, Germany

Abstract: Literature in the last forty years is swamped with a myriad of studies on the relationshipbetween asset returns and volatility. Although the correlation between these two variablesis already well-documented, our knowledge regarding their causal relationship remains limited. This study formally investigates the true dynamic relationship between the VIX implied volatility index and the S&P500 returns. Innovation accounting results indicate strong influence of S&P500 returns on VIX but not vice versa. Plus, unexpected S&P500 losses tend to increase VIX temporarily, while return shocks in general have permanent impact on VIX in the adverse direction of the shock.

Keywords: Volatility feedback hypothesis; Leverage effect; Endogeneity (search for similar items in EconPapers)
JEL-codes: C01 G10 G14 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:104687

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