Volatility Co-Movement

25 Pages Posted: 28 Aug 2005

Date Written: August 19, 2005

Abstract

I estimate a GARCH-based volatility factor model that incorporates market volatility and information from high-frequency data. I find that index and stock volatility co-move more after the stock becomes part of SP500. This effect is characteristic to higher frequencies (i.e. hourly) and it is beyond what is predicted by an increase in return comovement. One proposed hypothesis consistent with the findings argues that volatility comovement is induced by 'trading mechanism noise' such as noise generated during index arbitrage operations. Additional behavioral hypotheses may be supported by my results. Moreover, volatility has more uniform intra-day distribution after the addition.

Keywords: Volatility, factor model, comovement, multiplicative error model, index addition, event study

JEL Classification: G10, G12, G14

Suggested Citation

Gabudean, Radu, Volatility Co-Movement (August 19, 2005). Available at SSRN: https://ssrn.com/abstract=786784 or http://dx.doi.org/10.2139/ssrn.786784

Radu Gabudean (Contact Author)

American Century Investments ( email )

1665 Charleston Road
Mountain View, CA 94043
United States

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