Asymmetric Response of Volatility: Evidence from Stochastic Volatility Models and Realized Volatility

Jun Yu

No 24-2004, Working Papers from Singapore Management University, School of Economics

Abstract: This paper examines the asymmetric response of equity volatility to return shocks. We generalize the news impact function (NIF), originally introduced by Engle and Ng (1993) to study asymmetric volatility under the ARCH-type models, to be applicable to both stochastic volatility (SV) and ARCH-type models. Based on the generalized concept, we provide a unified framework to examine asymmetric properties of volatility. A new asymmetric volatility model, which nests both ARCH and SV models and at the same time allows for a more flexible NIF, is proposed. Empirical results based on daily index return data support the classical asymmetric SV model with a monotonically decreasing NIF. This empirical result is further reinforced by the realized volatility obtained from high frequency intraday data. We document the option pricing implications of these findings.

Keywords: Bayes factors; Leverage effect; Markov chain Monte Carlo; EGARCH; Realized volatility; Asymmetric volatility (search for similar items in EconPapers)
JEL-codes: C11 C15 G12 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in SMU Economics and Statistics Working Paper Series

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