No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns
John Campbell () and
No 3742, NBER Working Papers from National Bureau of Economic Research, Inc
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.
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)
Journal Article: No news is good news *1: An asymmetric model of changing volatility in stock returns (1992)
Working Paper: No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns (1992)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:3742
Ordering information: This working paper can be ordered from
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 ().