Volatility puzzles: a unified framework for gauging return-volatility regressions

Tim Bollerslev and Hao Zhou

No 2003-40, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper provides a simple unified framework for assessing the empirical linkages between returns and realized and implied volatilities. First, we show that whereas the volatility feedback effect as measured by the sign of the correlation between contemporaneous return and realized volatility depends importantly on the underlying structural model parameters, the correlation between return and implied volatility is unambiguously positive for all reasonable parameter configurations. Second, the lagged return-volatility asymmetry, or the leverage effect, is always stronger for implied than realized volatility. Third, implied volatilities generally provide downward biased forecasts of subsequent realized volatilities. Our results help explain previous findings reported in the extant empirical literature, and is further corroborated by new estimation results for a sample of monthly returns and implied and realized volatilities for the aggregate S&P market index.

Keywords: Financial; markets (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-ets, nep-fin and nep-fmk
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Citations: View citations in EconPapers (6)

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