Volatility in equilibrium: Asymmetries and dynamic dependencies

Journal Article

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. © The Authors 2011.

Full Text

Duke Authors

Cited Authors

  • Bollerslev, T; Sizova, N; Tauchen, G

Published Date

  • 2012

Published In

Volume / Issue

  • 16 / 1

Start / End Page

  • 31 - 80

International Standard Serial Number (ISSN)

  • 1572-3097

Digital Object Identifier (DOI)

  • 10.1093/rof/rfr005