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
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.
|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|
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