Extreme asymmetric volatility: Stress and aggregate asset prices
SujetMarket volatility; Asymmetric volatility; Leverage effect; Volatility feedback; Market stress; Financial stability; Systemic risk; Extreme volatility; Aggregate asset prices
JEL codeG.G1.G12; G.G1.G14; G.G1.G15
Journal issueJournal of International Financial Markets, Institutions and Money
MetadataShow full item record
1032 Dauphine Recherches en Management [DRM]
233373 Passau University
Abstract (EN)Asymmetric volatility in equity markets has been widely documented in finance (Bekaert and Wu, 2000)). We study asymmetric volatility for daily S&P 500 index returns and VIX index changes, thereby examining the relation between extreme changes in risk-neutral volatility expectations, i.e. market stress, and aggregate asset prices. To this aim, we model market returns, implied VIX market volatility and volatility of volatility, showing that the latter is asymmetric in that past positive volatility shocks drive positive shocks to volatility of volatility. Our main result documents the existence of a significant extreme asymmetric volatility effect as we find contemporaneous volatility-return tail dependence for crashes but not for booms. We then outline aggregate market price implications of extreme asymmetric volatility, indicating that under volatility feedback a one-in-a-hundred trading day innovation to average VIX implied volatility, for example, relates to an expected market drop of more than 4 percent.
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