Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

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

CREATES Research Papers from School of Economics and Management, University of Aarhus

Abstract: Stock market volatility clusters in time, carries a risk premium, is fractionally inte- grated, 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, in- volving 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 pre- mium, 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)
New Economics Papers: this item is included in nep-fmk, nep-mst and nep-ore
Date: 2009-02-17
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