Trading with Asymmetric Volatility Spillovers

21 Pages Posted: 11 Dec 2007

See all articles by Angel Pardo

Angel Pardo

affiliation not provided to SSRN

Hipòlit Torró

University of Valencia

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Abstract

We study the profitability of trading strategies based on volatility spillovers between large and small firms. By using the Volatility Impulse-Response Function of Lin (1997) and its extensions, we detect that any volatility shock coming from small companies is important to large companies, but the reverse is only true for negative shocks coming from large firms. To exploit these asymmetric patterns in volatility, different trading rules are designed based on the inverse relationship existing between expected return and volatility. We find that most strategies generate excess after-transaction cost profits, especially after very bad news and very good news coming from large or small firm markets. These results are of special interest because of their implications for risk and portfolio management.

Suggested Citation

Pardo, Angel and Torró, Hipòlit, Trading with Asymmetric Volatility Spillovers. Journal of Business Finance & Accounting, Vol. 34, Nos. 9-10, pp. 1548-1568, November/December 2007. Available at SSRN: https://ssrn.com/abstract=1065846 or http://dx.doi.org/10.1111/j.1468-5957.2007.02029.x

Angel Pardo

affiliation not provided to SSRN

No Address Available

Hipòlit Torró (Contact Author)

University of Valencia ( email )

Facultat d'Economia
Av. dels Tarongers s/n
Valencia, 46022
Spain
34-6-162 50 74 (Phone)
34-6-382 83 70 (Fax)

HOME PAGE: http://www.uv.es/torro

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