Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

51 Pages Posted: 22 Feb 2009

See all articles by Tim Bollerslev

Tim Bollerslev

Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Natalia Sizova

Bing Ads Marketplace, Microsoft

George Tauchen

Duke University - Economics Group

Multiple version iconThere are 3 versions of this paper

Date Written: 2009

Abstract

Stock market volatility clusters in time, carries a risk premium, is fractionally integrated, and exhibits asymmetric leverage effects relative to returns. This paper develops a first internally consistent equilibrium based explanation for these longstanding empirical facts. The model is cast in continuous-time and entirely self-contained, involving non-separable recursive preferences. We show that the qualitative theoretical implications from the new model match remarkably well with the distinct shapes and patterns in the sample autocorrelations of the volatility and the volatility risk premium, and the dynamic cross-correlations of the volatility measures with the returns calculated from actual high-frequency intra-day data on the S&P 500 aggregate market and VIX volatility indexes.

Keywords: Equilibrium asset pricing, stochastic volatility, leverage effect, volatility feed-back, option implied volatility, realized volatility, variance risk premium

JEL Classification: C22, C51, C52, G12, G13, G14

Suggested Citation

Bollerslev, Tim and Sizova, Natalia and Tauchen, George E., Volatility in Equilibrium: Asymmetries and Dynamic Dependencies (2009). Available at SSRN: https://ssrn.com/abstract=1345067 or http://dx.doi.org/10.2139/ssrn.1345067

Tim Bollerslev (Contact Author)

Duke University - Finance ( email )

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Natalia Sizova

Bing Ads Marketplace, Microsoft ( email )

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George E. Tauchen

Duke University - Economics Group ( email )

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