EconPapers    
Economics at your fingertips  
 

No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns

John Campbell () and Ludger Hentschel

No 3742, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: It is sometimes argued that an increase in stock market volatility raises required stock returns, and thus lowers stock prices. This paper modifies the generalized autoregressive conditionally heteroskedastic (GARCH) model of returns to allow for this volatility feedback effect. The resulting model is asymmetric, because volatility feedback amplifies large negative stock returns and dampens large positive returns, making stock returns negatively skewed and increasing the potential for large crashes. The model also implies that volatility feedback is more important when volatility is high. In U.S. monthly and daily data in the period 1926-88, the asymmetric model fits the data better than the standard GARCH model, accounting for almost half the skewness and excess kurtosis of standard monthly GARCH residuals. Estimated volatility discounts on the stock market range from 1% in normal times to 13% after the stock market crash of October 1987 and 25% in the early 1930's. However volatility feedback has little effect on the unconditional variance of stock returns.

Date: 1991-06
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31) Track citations by RSS feed

Published as Journal of Financial Economics vol. 31, 1992, p. 281-318

Downloads: (external link)
http://www.nber.org/papers/w3742.pdf (application/pdf)

Related works:
Journal Article: No news is good news *1: An asymmetric model of changing volatility in stock returns (1992) Downloads
Working Paper: No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns (1992) Downloads
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:nbr:nberwo:3742

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w3742

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2019-08-23
Handle: RePEc:nbr:nberwo:3742