Extreme Asymmetric Volatility, Leverage, Feedback and Asset Prices

Niklas Wagner and Sofiane Aboura
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Niklas Wagner: Department of Business and Economics - Passau University
Sofiane Aboura: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: Asymmetric volatility in equity markets has been widely documented in finance, where two competing explanations, as considered in Bekaert and Wu (2000), are the financial leverage and the volatility feedback hypothesis. We explicitly test for the role of both hypotheses in explaining extreme daily U.S. equity market movements during the period January 1990 to September 2008. To this aim, we examine asymmetric volatility based on a novel model of market returns, conditional market volatility and volatility of volatility. We then test for extreme asymmetry and the distinct predictions of both hypotheses. Our results document significant extreme asymmetric volatility. This effect is contemporaneous, consistent with both hypotheses, and it is important for large market declines. We further point out aggregate asset pricing implications under extreme volatility feedback.

Keywords: Market stress; Asymmetric volatility; Leverage effect; Effet de levier; Market volatility; Volatility feedback (search for similar items in EconPapers)
Date: 2010-06-03
Note: View the original document on HAL open archive server: https://hal.science/hal-01526073v1
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Published in International Risk Management Conference (IRMC 2010): "Financial Stability and Value", Jun 2010, Florence, Italy

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