The Reactive Volatility Model

15 Pages Posted: 8 Aug 2012

See all articles by Sébastien Valeyre

Sébastien Valeyre

John Locke Investments

Denis Grebenkov

CNRS; Ecole Polytechnique, PMC; PMC, CNRS - Ecole Polytechnique

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management

Qian Liu

John Locke Investments

Date Written: July 1, 2012

Abstract

We present a new volatility model, simple to implement, that combines various attractive features such as an exponential moving average of the price and a leverage effect. This model is able to capture the so-called 'panic effect', which occurs whenever systematic risk becomes the dominant factor. Consequently, in contrast to other models, this new model is as reactive as the implied volatility indices. We also test the reactivity of our model using extreme events taken from the 470 most liquid European stocks over the last decade. We show that the reactive volatility model is more robust to extreme events, and it allows for the identification of precursors and replicas of extreme events.

Keywords: volatility, tail event, risk management, asset pricing

JEL Classification: C5, G01, G1, G32

Suggested Citation

Valeyre, Sébastien and Grebenkov, Denis and Aboura, Sofiane and Liu, Qian, The Reactive Volatility Model (July 1, 2012). Available at SSRN: https://ssrn.com/abstract=2126483 or http://dx.doi.org/10.2139/ssrn.2126483

Sébastien Valeyre

John Locke Investments ( email )

38 Avenue Franklin Roosevelt
Fontainebleau-Avon, 77210
France

Denis Grebenkov

CNRS ( email )

3, rue Michel-Ange
Paris cedex 16, 75794
France
+33169334662 (Phone)
+33169334799 (Fax)

HOME PAGE: http://pmc.polytechnique.fr/pagesperso/dg/

Ecole Polytechnique, PMC ( email )

Route de Saclay
Palaiseau, 91128
France
+33169334662 (Phone)
+33169334799 (Fax)

HOME PAGE: http://pmc.polytechnique.fr/pagesperso/dg/

PMC, CNRS - Ecole Polytechnique ( email )

Route de Saclay
Palaiseau, 91128
France
+33169334662 (Phone)
+33169334799 (Fax)

HOME PAGE: http://pmc.polytechnique.fr/pagesperso/dg

Sofiane Aboura (Contact Author)

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

99 avenue Jean-Baptiste
Clément, Villetaneuse 93430
France

Qian Liu

John Locke Investments ( email )

38 Avenue Franklin Roosevelt
Fontainebleau-Avon, 77210
France
33164704044 (Phone)
33160749938 (Fax)

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