A Behavioral Explanation for the Negative Asymmetric Return-Volatility Relation

30 Pages Posted: 23 May 2019

See all articles by Ann Marie Hibbert

Ann Marie Hibbert

West Virginia University

Robert T. Daigler

Florida International University (FIU) - Department of Finance

Brice V. Dupoyet

Florida International University - College of Business Administration - Finance

Date Written: March 29, 2008

Abstract

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

Hibbert, Ann Marie and Daigler, Robert T. and Dupoyet, Brice, A Behavioral Explanation for the Negative Asymmetric Return-Volatility Relation (March 29, 2008). Available at SSRN: https://ssrn.com/abstract=3362617 or http://dx.doi.org/10.2139/ssrn.3362617

Ann Marie Hibbert

West Virginia University ( email )

Morgantown, WV 26506
United States

Robert T. Daigler

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-3325 (Phone)
305-348-4245 (Fax)

Brice Dupoyet (Contact Author)

Florida International University - College of Business Administration - Finance ( email )

University Park, RB 209 A
11200 SW 8th Street
Miami, FL 33199
United States
305-348-3328 (Phone)
305-348-4245 (Fax)

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