Stochastic Volatility in General Equilibrium

George Tauchen ()

Quarterly Journal of Finance (QJF), 2011, vol. 01, issue 04, 707-731

Abstract: The connections between stock market volatility and returns are studied within the context of a general equilibrium framework. The framework rules outa prioriany purely statistical relationship between volatility and returns by imposing uncorrelated innovations. The main model generates a two-factor structure for stock market volatility along with time-varying risk premiums on consumption and volatility risk. It also generates endogenously a dynamic leverage effect (volatility asymmetry), the sign of which depends upon the magnitudes of the risk aversion and the intertemporal elasticity of substitution parameters.

Keywords: Stochastic volatility; risk aversion; leverage effect; volatility asymmetry; G12; C51; C52 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (19)

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DOI: 10.1142/S2010139211000237

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