Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

Tim Bollerslev, Natalia Sizova and George Tauchen ()

No 10-34, Working Papers from Duke University, Department of Economics

Abstract: Stock market volatility clusters in time, appears fractionally integrated, carries a risk premium, and exhibits asymmetric leverage effects relative to returns. At the same time, the volatility risk premium, defined by the difference between the risk-neutral and objective expectations of the volatility, is distinctly less persistent and appears short-memory. This paper develops the first internally consistent equilibrium based explanation for all of these empirical facts. The model is cast in continuous-time and entirely self-contained, involving non-separable recursive preferences. Our empirical investigations are made possible through the use of newly available high-frequency intra-day data for the VIX volatility index, along with corresponding high-frequency data for the S&P 500 aggregate market portfolio. We show that the qualitative implications from the new theoretical model match remarkably well with the distinct shapes and patterns in the sample auto-correlations and dynamic cross-correlations in the returns and volatilities observed in the data.

Keywords: Equilibrium asset pricing; stochastic volatility; leverage effect; volatility feedback; option implied volatility; realized volatility; variance risk premium (search for similar items in EconPapers)
JEL-codes: C22 C51 C52 G12 G13 G14 (search for similar items in EconPapers)
Pages: 52
Date: 2010
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2011)
Working Paper: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2009)
Working Paper: Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:10-34

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