Stochastic Volatility in General Equilibrium

33 Pages Posted: 24 Aug 2005

See all articles by George Tauchen

George Tauchen

Duke University - Economics Group

Date Written: June 15, 2004

Abstract

The connections between stock market volatility and returns are studied within the context of a general equilibrium framework. The framework rules out it a priori any purely statistical relationship between volatility and returns by imposing uncorrelated innovations. The main model generates a two-factor structure for stock market volatility along with time-varying risk premiums on consumption and volatility risk. It also generates endogenously a dynamic leverage effect (volatility asymmetry), the sign of which depends upon the magnitudes of the risk aversion and the intertemporal elasticity of substitution parameters.

Keywords: Stochastic volatility, risk aversion, leverage effect, volatility asymmetry

JEL Classification: G12, C51, C52

Suggested Citation

Tauchen, George E., Stochastic Volatility in General Equilibrium (June 15, 2004). Available at SSRN: https://ssrn.com/abstract=782746 or http://dx.doi.org/10.2139/ssrn.782746

George E. Tauchen (Contact Author)

Duke University - Economics Group ( email )

Box 90097
221 Social Sciences
Durham, NC 27708-0097
United States
919-660-1812 (Phone)
919-684-8974 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
261
Abstract Views
1,430
rank
129,730
PlumX Metrics