Abstract

http://ssrn.com/abstract=2348137
 


 



Resolution of Policy Uncertainty and Sudden Declines in Volatility


Dante Amengual


Centre for Monetary and Financial Studies (CEMFI)

Dacheng Xiu


University of Chicago - Booth School of Business

October 28, 2013

Chicago Booth Research Paper No. 13-78
Fama-Miller Working Paper

Abstract:     
We introduce downward volatility jumps into a general framework of modeling the term structure of variance. With variance swap data alone, we find that downward volatility jumps are associated with a resolution of policy uncertainty, in particular through statements from Federal Open Market Committee meetings and speeches of Federal Reserve chairmen, and that such jumps are priced with positive risk premia, which reflect the premia for the "put protection" offered by the Federal Reserve. On the modeling side, we explore the structural differences and relative goodness-of-fits of factor specifications, and find that a log-volatility model with two Ornstein-Uhlenbeck factors and two-sided jumps is superior in capturing the volatility dynamics.

Number of Pages in PDF File: 59

Keywords: Quadratic Volatility Models, Log Volatility Models, Downward Volatility Jumps, Variance Swaps

JEL Classification: G12, G13

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Date posted: November 2, 2013  

Suggested Citation

Amengual, Dante and Xiu, Dacheng, Resolution of Policy Uncertainty and Sudden Declines in Volatility (October 28, 2013). Chicago Booth Research Paper No. 13-78; Fama-Miller Working Paper . Available at SSRN: http://ssrn.com/abstract=2348137 or http://dx.doi.org/10.2139/ssrn.2348137

Contact Information

Dante Amengual
Centre for Monetary and Financial Studies (CEMFI) ( email )
Casado del Alisal 5
28014 Madrid
Spain
Dacheng Xiu (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
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