The dynamic conditional relationship between stock market returns and implied volatility

Sung Y. Park, Doojin Ryu and Jeongseok Song

Physica A: Statistical Mechanics and its Applications, 2017, vol. 482, issue C, 638-648

Abstract: Using the dynamic conditional correlation multivariate generalized autoregressive conditional heteroskedasticity (DCC-MGARCH) model, we empirically examine the dynamic relationship between stock market returns (KOSPI200 returns) and implied volatility (VKOSPI), as well as their statistical mechanics, in the Korean market, a representative and leading emerging market. We consider four macroeconomic variables (exchange rates, risk-free rates, term spreads, and credit spreads) as potential determinants of the dynamic conditional correlation between returns and volatility. Of these macroeconomic variables, the change in exchange rates has a significant impact on the dynamic correlation between KOSPI200 returns and the VKOSPI, especially during the recent financial crisis. We also find that the risk-free rate has a marginal effect on this dynamic conditional relationship.

Keywords: Dynamic correlation; Implied volatility; KOSPI200; Macroeconomic variables; VKOSPI (search for similar items in EconPapers)
JEL-codes: C22 E44 F36 G17 G19 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:482:y:2017:i:c:p:638-648

DOI: 10.1016/j.physa.2017.04.023

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