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Volatility puzzles: A simple framework for gauging return-volatility regressions

Publication ,  Journal Article
Bollerslev, T; Zhou, H
Published in: Journal of Econometrics
March 1, 2006

This paper provides a simple theoretical framework for assessing the empirical linkages between returns and realized and implied volatilities. First, we show that whereas the volatility feedback effect as measured by the sign of the correlation between contemporaneous return and realized volatility depends importantly on the underlying structural model parameters, the correlation between return and implied volatility is unambiguously positive for all reasonable parameter configurations. Second, the asymmetric response of current volatility to lagged negative and positive returns, typically referred to as the leverage effect, is always stronger for implied than realized volatility. Third, implied volatilities generally provide downward biased forecasts of subsequent realized volatilities. Our results help explain previous findings reported in the extant empirical literature, and is further corroborated by new estimation results for a sample of monthly returns and implied and realized volatilities for the S&P500 aggregate market index. © 2005 Elsevier B.V. All rights reserved.

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Published In

Journal of Econometrics

DOI

ISSN

0304-4076

Publication Date

March 1, 2006

Volume

131

Issue

1-2

Start / End Page

123 / 150

Related Subject Headings

  • Econometrics
  • 4905 Statistics
  • 3802 Econometrics
  • 3801 Applied economics
  • 1403 Econometrics
  • 1402 Applied Economics
  • 0104 Statistics
 

Citation

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Bollerslev, T., & Zhou, H. (2006). Volatility puzzles: A simple framework for gauging return-volatility regressions. Journal of Econometrics, 131(1–2), 123–150. https://doi.org/10.1016/j.jeconom.2005.01.006
Bollerslev, T., and H. Zhou. “Volatility puzzles: A simple framework for gauging return-volatility regressions.” Journal of Econometrics 131, no. 1–2 (March 1, 2006): 123–50. https://doi.org/10.1016/j.jeconom.2005.01.006.
Bollerslev T, Zhou H. Volatility puzzles: A simple framework for gauging return-volatility regressions. Journal of Econometrics. 2006 Mar 1;131(1–2):123–50.
Bollerslev, T., and H. Zhou. “Volatility puzzles: A simple framework for gauging return-volatility regressions.” Journal of Econometrics, vol. 131, no. 1–2, Mar. 2006, pp. 123–50. Scopus, doi:10.1016/j.jeconom.2005.01.006.
Bollerslev T, Zhou H. Volatility puzzles: A simple framework for gauging return-volatility regressions. Journal of Econometrics. 2006 Mar 1;131(1–2):123–150.
Journal cover image

Published In

Journal of Econometrics

DOI

ISSN

0304-4076

Publication Date

March 1, 2006

Volume

131

Issue

1-2

Start / End Page

123 / 150

Related Subject Headings

  • Econometrics
  • 4905 Statistics
  • 3802 Econometrics
  • 3801 Applied economics
  • 1403 Econometrics
  • 1402 Applied Economics
  • 0104 Statistics