Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

Tim Bollerslev, Natalia Sizova and George Tauchen ()

Review of Finance, 2011, vol. 16, issue 1, 31-80

Abstract: Stock market volatility clusters in time, appears fractionally integrated, carries a risk premium, and exhibits asymmetric leverage effects. At the same time, the volatility risk premium, defined by the difference between the risk-neutral and objective expectations of the volatility, features short memory. This paper develops the first internally consistent equilibrium-based explanation for all these empirical facts. Using newly available high-frequency intraday data for the S&P 500 and the VIX volatility index, the authors show that the qualitative implications from the new theoretical continuous-time model match remarkably well with the distinct shapes and patterns in the sample autocorrelations and dynamic cross-correlations actually observed in the data. Copyright 2011, Oxford University Press.

Date: 2011
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Related works:
Working Paper: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2010)
Working Paper: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2009)
Working Paper: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2009)
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