Does continuous good news still mean good news for market volatility?

Shaobin Ding, Hongju Wang and Qin Sun

Finance Research Letters, 2025, vol. 72, issue C

Abstract: Examining volatility asymmetry cyclically, volatility asymmetry may reverse in bull markets, volatility reacts more strongly to good news than to bad news, especially in emerging markets. We explain this phenomenon using extrapolated expectations: through extrapolated expectations, continuous good (bad) news amplifies asset price deviations from fundamentals, we modeled this for a more formal description. In the empirical analysis with Chinese data, we add the interaction term between extrapolated expected behavior and news shocks to the volatility equation, its coefficient is significantly positive in bull markets, suggesting extrapolated expectations amplify the impact of good news on volatility during bull markets.

Keywords: Extrapolated expectations; Stock market volatility; Volatility asymmetry; Behavioral finance (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324016696

DOI: 10.1016/j.frl.2024.106640

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