Macroeconomic Determinants of Stock Market Volatility and Volatility Risk-Premiums

70 Pages Posted: 14 Feb 2012  

Valentina Corradi

University of Warwick - Department of Economics

Walter Distaso

Imperial College Business School

Antonio Mele

Swiss Finance Institute & University of Lugano; Centre for Economic Policy Research (CEPR)

Date Written: April 22, 2012

Abstract

How does stock market volatility relate to the business cycle? We develop, and estimate, a no-arbitrage model to study the cyclical properties of stock volatility and the risk-premiums the market requires to bear the risk of uctuations in this volatility. The level of stock market volatility cannot be explained by the mere existence of the business cycle. Rather, it relates to the presence of some unobserved factor. At the same time, our model predicts that such an unobservable factor cannot explain the ups and downs stock volatility experiences over time - the "volatility of volatility." Instead, the volatility of stock volatility relates to the business cycle. Finally, volatility risk-premiums are strongly countercyclical, even more so than stock volatility, and are partially responsible for the large swings in the VIX index occurred during the 2007-2009 subprime crisis, which our model does capture in out-of-sample experiments.

Keywords: Aggregate stock market volatility, volatility risk-premiums, volatility of volatility, business cycle, no-arbitrage restrictions, simulation-based inference

JEL Classification: C15, C32, E37, E44, G13, G17

Suggested Citation

Corradi, Valentina and Distaso, Walter and Mele, Antonio, Macroeconomic Determinants of Stock Market Volatility and Volatility Risk-Premiums (April 22, 2012). Swiss Finance Institute Research Paper No. 12-18. Available at SSRN: https://ssrn.com/abstract=2005021 or http://dx.doi.org/10.2139/ssrn.2005021

Valentina Corradi

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

Walter Distaso (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Antonio Mele

Swiss Finance Institute & University of Lugano ( email )

Via Buffi, 13
Lugano, 6900
Switzerland

HOME PAGE: http://www.antoniomele.org

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Paper statistics

Downloads
667
Rank
30,537
Abstract Views
3,621