A Behavioral Explanation for the Negative Asymmetric Return-Volatility Relation
30 Pages Posted: 23 May 2019
Date Written: March 29, 2008
We examine the short-term dynamic relation between the S&P 500 (Nasdaq 100) index return and changes in implied volatility at both the daily and intraday level. Neither the leverage hypothesis nor the volatility feedback hypothesis adequately explains the results. Alternatively, we propose that the behavior of traders (from the representativeness, affect, and extrapolation bias concepts of behavioral finance) is consistent with our empirical results of a strong daily and intraday negative return–implied volatility relation. Moreover, both the presence and magnitude of the negative relation and the asymmetry between return and implied volatility are most closely associated with extreme changes in the index returns. We also show that the strength of the relation is consistent with the implied volatility skew.
Keywords: Return–volatility relation; Behavioral finance; Leverage hypothesis; Volatility feedback hypothesis; VIX
JEL Classification: G12
Suggested Citation: Suggested Citation