Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

Stock market volatility clusters in time, appears fractionally integrated, carries a risk premium, and exhibits asymmetric leverage effects. At the same time, the volatility risk premium, defined by the difference between the risk-neutral and objective expectations of the volatility, features short...

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Bibliographic Details
Published in:Review of Finance 2012, Vol.16 (1), p.31-80
Main Authors: Bollerslev, Tim, Sizova, Natalia, Tauchen, George
Format: Article
Language:English
Subjects:
Correlation analysis
Indexes
Risk premiums
Studies
Volatility
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Summary:Stock market volatility clusters in time, appears fractionally integrated, carries a risk premium, and exhibits asymmetric leverage effects. At the same time, the volatility risk premium, defined by the difference between the risk-neutral and objective expectations of the volatility, features short memory. This paper develops the first internally consistent equilibrium-based explanation for all these empirical facts. Using newly available high-frequency intraday data for the S&P 500 and the VIX volatility index, the authors show that the qualitative implications from the new theoretical continuous-time model match remarkably well with the distinct shapes and patterns in the sample autocorrelations and dynamic cross-correlations actually observed in the data.
ISSN:1572-3097
1573-692X
1875-824X
DOI:10.1093/rof/rfr005