Macroeconomic Determinants of Stock Market Volatility and Volatility Risk-Premiums

Valentina Corradi, Walter Distaso and Antonio Mele
Additional contact information
Walter Distaso: Imperial College Business School

No 12-18, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: How does stock market volatility relate to the business cycle? We develop, and estimate, a no-arbitrage model to study the cyclical properties of stock volatility and the risk-premiums the market requires to bear the risk of uctuations in this volatility. The level of stock market volatility cannot be explained by the mere existence of the business cycle. Rather, it relates to the presence of some unobserved factor. At the same time, our model predicts that such an unobservable factor cannot explain the ups and downs stock volatility experiences over time - the "volatility of volatility." Instead, the volatility of stock volatility relates to the business cycle. Finally, volatility risk-premiums are strongly countercyclical, even more so than stock volatility, and are partially responsible for the large swings in the VIX index occurred during the 2007-2009 subprime crisis, which our model does capture in out-of-sample experiments.

Keywords: Aggregate stock market volatility; volatility risk-premiums; volatility of volatility; business cycle; no-arbitrage restrictions; simulation-based inference (search for similar items in EconPapers)
JEL-codes: C15 C32 E37 E44 G13 G17 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2012-02
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://ssrn.com/abstract=2005021 (application/pdf)

Related works:
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:chf:rpseri:rp1218

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().