How Do Volatility and Return Series Interact?

Söylemez, Arif Orçun (2020): How Do Volatility and Return Series Interact?

Abstract

Literature in the last forty years is swamped with a myriad of studies on the relationshipbetween asset returns and volatility. Although the correlation between these two variablesis already well-documented, our knowledge regarding their causal relationship remains limited. This study formally investigates the true dynamic relationship between the VIX implied volatility index and the S&P500 returns. Innovation accounting results indicate strong influence of S&P500 returns on VIX but not vice versa. Plus, unexpected S&P500 losses tend to increase VIX temporarily, while return shocks in general have permanent impact on VIX in the adverse direction of the shock.

• Item Type: MPRA Paper
• Language: English
• Keywords: Volatility feedback hypothesis; Leverage effect; Endogeneity
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

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