Trading with Asymmetric Volatility Spillovers

University of Valencia Financial Economics Working Paper

38 Pages Posted: 6 Oct 2003

See all articles by Ángel Pardo Tornero

Ángel Pardo Tornero

University of Valencia - Department of Financial Economics

Hipòlit Torró

University of Valencia

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

We study the profitability of trading strategies based on volatility spillovers between large and small firms. By using the Volatility Impulse-Response Function of Lin (1997) and its extensions, we detect that any volatility shock coming from small companies is important to large companies, but the reverse is only true for negative shocks coming from large firms. To exploit these asymmetric patterns in volatility, different trading rules have been designed based on the inverse relationship existing between expected return and volatility. We find that most strategies generate excess after-transaction profits, especially after very bad news and very good news coming from large or small firm markets. These results are of special interest because of implications for risk and portfolio management.

Keywords: Asymmetric Volatility Spillovers, Feedback effect, Large and small firms, IBEX-35, Trading rules

JEL Classification: G11

Suggested Citation

Pardo Tornero, Ángel and Torró, Hipòlit, Trading with Asymmetric Volatility Spillovers (January 2005). University of Valencia Financial Economics Working Paper. Available at SSRN: https://ssrn.com/abstract=427081 or http://dx.doi.org/10.2139/ssrn.427081

Ángel Pardo Tornero

University of Valencia - Department of Financial Economics ( email )

Avda. del Tarongers, s/n
46022 Valencia
Spain

Hipòlit Torró (Contact Author)

University of Valencia ( email )

Facultat d'Economia
Av. dels Tarongers s/n
Valencia, 46022
Spain
34-6-162 50 74 (Phone)
34-6-382 83 70 (Fax)

HOME PAGE: http://www.uv.es/torro

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