The Determinants of Asymmetric Volatility
University of Houston; China Academy of Financial Research (CAFR)
Volatility in equity markets is asymmetric: contemporaneous return and conditional return volatility are negatively correlated. In this paper we develop an asymmetric volatility model where dividend growth and dividend volatility are the two state variables of the economy. The model allows both the leverage effect and the volatility feedback effect, the two popular explanations of the asymmetry. The model is estimated by the simulated method of moments. We find that both the leverage effect and the volatility feedback are important determinants of asymmetric volatility, and volatility feedback is significant both statistically and economically.
Number of Pages in PDF File: 33
Keywords: Asset pricing, volatility, asymmetric volatility, leverage effect, volatility feedback
JEL Classification: G10, G12, C5working papers series
Date posted: December 27, 2000
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