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

Rice University

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 )

Durham, NC 27708-0120
United States
919-660-1846 (Phone)
919-684-8974 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Natalia Sizova

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

George E. Tauchen

Duke University - Economics Group ( email )

Box 90097
221 Social Sciences
Durham, NC 27708-0097
United States
919-660-1812 (Phone)
919-684-8974 (Fax)

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