Unravelling the asymmetric volatility puzzle: A novel explanation of volatility through anchoring

Mihály Ormos and Dusan Timotity

Economic Systems, 2016, vol. 40, issue 3, 345-354

Abstract: This paper discusses a novel explanation for asymmetric volatility based on the anchoring behavioral pattern. Anchoring as a heuristic bias causes investors to focus on recent price changes and price levels, which leads to a belief in continuing trend and mean-reversion, respectively. The empirical results support our theoretical explanation through an analysis of large price fluctuations in the S&P 500 and the resulting effects on implied and realized volatility. These results indicate that asymmetry (a negative relationship) between shocks and volatility in the subsequent period indeed exist. Moreover, contrary to previous research, our empirical tests also suggest that implied volatility is not simply an upward biased predictor of future deviation compensating for the variance of the volatility but rather, due to investors’ systematic anchoring to losses and gains in their volatility forecasts, a co-integrated yet asymmetric over-/under-estimated financial instrument. We also provide results indicating that the medium-term implied volatility (measured by the VIX Index) is an unbiased though inefficient estimation of realized volatility, while in contrast short-term volatility (measured by the recently introduced VXST Index representing the 9-day implied volatility) is also unbiased and yet efficient.

Keywords: Anchoring; Implied volatility; Realized volatility; Asymmetric volatility; VIX; VXST (search for similar items in EconPapers)
JEL-codes: C53 C58 G02 G14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0939362516300309
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Unravelling the Asymmetric Volatility Puzzle: A Novel Explanation of Volatility Through Anchoring (2016)
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:eee:ecosys:v:40:y:2016:i:3:p:345-354

DOI: 10.1016/j.ecosys.2015.09.008

Access Statistics for this article

Economic Systems is currently edited by R. Frensch

More articles in Economic Systems from Elsevier Contact information at EDIRC.
Bibliographic data for series maintained by Catherine Liu ().