Asymmetric Volatility and Risk in Equity Markets

60 Pages Posted: 25 May 2006

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Guojun Wu

University of Houston; China Academy of Financial Research (CAFR)

Date Written: April 1997

Abstract

It appears that volatility in equity markets is asymmetric: returns and conditional volatility are negatively correlated. We provide a unified framework to simultaneously investigate asymmetric volatility at the firm and the market level and to examine two potential explanations of the asymmetry: leverage effects and time-varying risk premiums. Our empirical application uses the market portfolio and portfolios with different leverage constructed from Nikkei 225 stocks, extending the empirical evidence on asymmetry to Japanese stocks. Although volatility asymmetry is present and significant at the market and the portfolio levels, its source differs across portfolios. We find that it is important to include leverage ratios in the volatility dynamics but that their economic effects are mostly dwarfed by the volatility feedback mechanism. Volatility feedback is enhanced by a phenomenon that we term covariance asymmetry: conditional covariances with the market increase only significantly following negative market news. We do not find significant asymmetries in conditional betas.

Suggested Citation

Bekaert, Geert and Wu, Guojun, Asymmetric Volatility and Risk in Equity Markets (April 1997). NBER Working Paper No. w6022. Available at SSRN: https://ssrn.com/abstract=226432

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Guojun Wu

University of Houston ( email )

220F Melcher Hall
Houston, TX 77204-6021
United States
713-743-4813 (Phone)
713-743-4789 (Fax)

HOME PAGE: http://www.bauer.uh.edu/wu

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Register to save articles to
your library

Register

Paper statistics

Downloads
110
rank
242,817
Abstract Views
2,596
PlumX Metrics