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Macroeconomic determinants of stock volatility and volatility premiums

Corradi, Valentina, Distaso, Walter and Mele, Antonio (2013) Macroeconomic determinants of stock volatility and volatility premiums. Journal of Monetary Economics, 60 (2). pp. 203-220. ISSN 0304-3932

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Abstract

How does stock market volatility relate to the business cycle? We develop, and estimate, a no-arbitrage model, and find that (i) the level and fluctuations of stock volatility are largely explained by business cycle factors and (ii) some unobserved factor contributes to nearly 20% to the overall variation in volatility, although not to its ups and downs. Instead, this “volatility of volatility” relates to the business cycle. Finally, volatility risk-premiums are strongly countercyclical, even more than stock volatility, and partially explain the large swings of the VIX index during the 2007–2009 subprime crisis, which our model captures in out-of-sample experiments.

Item Type: Article
Official URL: http://www.elsevier.com/wps/find/journaldescriptio...
Additional Information: © 2012 Elsevier B.V.
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Finance
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 28 Nov 2012 12:43
URL: http://eprints.lse.ac.uk/37399/

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