The Threshold Effect in Expected Volatility: A Model Based on Asymmetric Information

REVIEW OF FINANCIAL STUDIES, Vol. 10 No. 3

Posted: 30 Jul 1997

See all articles by Francois M. Longin

Francois M. Longin

ESSEC Business School - Finance Department

Abstract

This article develops theoretical insight into the threshold effect in expected volatility, which means that large shocks are less persistent in volatility than small shocks. The model uses the Kyle-Admati-Pfleiderer setup with liquidity traders, informed traders, and a market maker. Information is modeled as a GARCH process. It is shown that the GARCH process for information is transformed into a TARCH process (for "Threshold GARCH") for the market price changes. Working with information flows allows one to derive implications for trading volume and market liquidity which provide the basis for a more complete test of the model.

JEL Classification: C22, G12, G14

Suggested Citation

Longin, Francois M., The Threshold Effect in Expected Volatility: A Model Based on Asymmetric Information. REVIEW OF FINANCIAL STUDIES, Vol. 10 No. 3, Available at SSRN: https://ssrn.com/abstract=8447

Francois M. Longin (Contact Author)

ESSEC Business School - Finance Department ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France

HOME PAGE: www.longin.fr

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
657
PlumX Metrics