Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

Tim Bollerslev, Natalia Sizova and George Tauchen ()

No 10-73, Working Papers from Duke University, Department of Economics

Abstract: Stock market volatility clusters in time, appears fractionally integrated, carries a risk premium, and exhibits asymmetric leverage e®ects relative to returns. At the same time, the volatility risk premium, de¯ned by the di®erence between the risk-neutral and objective expectations of the volatility, is distinctly less persistent and appears short-memory. This paper develops the ¯rst internally consistent equilibrium based explanation for all of these empirical facts. The model is cast in continuous-time and entirely self-contained, involving non-separable recursive preferences. Our empirical investigations are made possible through the use of newly available high-frequency intra-day data for the VIX volatility index, along with corresponding high-frequency data for the S&P 500 aggregate market portfolio. We show that the qualitative implications from the new theoretical model match remarkably well with the distinct shapes and patterns in the sample autocorrelations and dynamic cross-correlations in the returns and volatilities observed in the data.

Keywords: Equilibrium asset pricing; stochastic volatility; leverage e®ect; volatility feedback; option implied volatility; realized volatility; variance risk premium (search for similar items in EconPapers)
JEL-codes: C22 C51 C52 G12 G13 G14 (search for similar items in EconPapers)
Pages: 46
Date: 2009
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2011)
Working Paper: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2010)
Working Paper: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:10-73

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