Extreme Asymmetric Volatility, Leverage, Feedback and Asset Prices

Posted: 6 Feb 2010 Last revised: 21 Jun 2015

See all articles by Sofiane Aboura

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management

Niklas Wagner

Passau University

Multiple version iconThere are 2 versions of this paper

Date Written: August 13, 2010

Abstract

Asymmetric volatility in equity markets has been widely documented in finance, where two competing explanations, as considered in Bekaert and Wu (2000), are the financial leverage and the volatility feedback hypothesis. We explicitly test for the role of both hypotheses in explaining extreme daily U.S. equity market movements during the period January 1990 to September 2008. To this aim, we examine asymmetric volatility based on a novel model of market returns, implied market volatility and volatility of volatility. We then test for extreme asymmetry and the distinct predictions of both hypotheses. Our results document significant extreme asymmetric volatility. This effect is contemporaneous, consistent with both hypotheses, and it is important for large market declines. We further derive aggregate asset pricing implications under extreme volatility feedback. Given our results, asymmetric volatility, which includes the effect of volatility feedback at extreme levels, is shown to play an important role in explaining substantial equity market declines.

Keywords: market volatility, asymmetric volatility, leverage effect, volatility feedback, VIX, market stress, systemic market risk

JEL Classification: C32, G1, G32

Suggested Citation

Aboura, Sofiane and Wagner, Niklas F., Extreme Asymmetric Volatility, Leverage, Feedback and Asset Prices (August 13, 2010). Available at SSRN: https://ssrn.com/abstract=1548439 or http://dx.doi.org/10.2139/ssrn.1548439

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management ( email )

99 avenue Jean-Baptiste
Clément, Villetaneuse 93430
France

Niklas F. Wagner (Contact Author)

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

Register to save articles to
your library

Register

Paper statistics

Abstract Views
586
PlumX Metrics