Limited information-processing capacity and asymmetric stock correlations

Ozcan Ceylan

Quantitative Finance, 2015, vol. 15, issue 6, 1031-1039

Abstract: Through an orthogonalized impulse-response analysis, I studied the relationship between the variance risk premium, market variance and stock correlations in the French stock market from September 2002 through September 2006, using high-frequency data-based measures. Variance risk premium is estimated using realized variances and index options-implied variances and used as a state vector to proxy investors perceived uncertainty. I found that a shock to variance risk premium causes long-lasting increases in the market variance pointing to the limitedness of investors information-processing capacity. At the same time, the shock generates consecutive increases in realized correlations between individual stocks and the market portfolio. I propose this as a possible explanation for the asymmetric/counter-cyclic behaviour of stock correlations.

Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/14697688.2013.808374 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Limited Information-Processing Capacity and Asymmetric Stock Correlations (2010)
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:taf:quantf:v:15:y:2015:i:6:p:1031-1039

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697688.2013.808374

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().