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Trading with Asymmetric Volatility Spillovers

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  • Angel Pardo
  • Hip�lit Torró

Abstract

We study the profitability of trading strategies based on volatility spillovers between large and small firms. By using the Volatility Impulse-Response Function of Lin (1997) and its extensions, we detect that any volatility shock coming from small companies is important to large companies, but the reverse is only true for negative shocks coming from large firms. To exploit these asymmetric patterns in volatility, different trading rules are designed based on the inverse relationship existing between expected return and volatility. We find that most strategies generate excess after-transaction cost profits, especially after "very bad news" and "very good news" coming from large or small firm markets. These results are of special interest because of their implications for risk and portfolio management. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

Volume (Year): 34 (2007-11)
Issue (Month): 9-10 ()
Pages: 1548-1568

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Handle: RePEc:bla:jbfnac:v:34:y:2007-11:i:9-10:p:1548-1568

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Cited by:
  1. George Milunovich & Susan Thorp, 2005. "Valuing Volatility Spillovers," Research Papers 0506, Macquarie University, Department of Economics.
  2. Andreas Andrikopoulos & Timotheos Angelidis, 2008. "Idiosyncratic risk, returns and liquidity in the London Stock Exchange: a spillover approach," Working Papers 0017, University of Peloponnese, Department of Economics.
  3. Mahmod Qadan & Joseph Yagil, 2012. "Fear sentiments and gold price: testing causality in-mean and in-variance," Applied Economics Letters, Taylor & Francis Journals, vol. 19(4), pages 363-366, March.
  4. Sinem Derindere KOSEOGLU & Emrah Ismail CEVIK, 2013. "Testing for Causality in Mean and Variance between the Stock Market and the Foreign Exchange Market: An Application to the Major Central and Eastern European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(1), pages 65-86, March.
  5. Jullavut Kittiakarasakun & Yiuman Tse & George H.K. Wang, 2012. "The impact of trades by traders on asymmetric volatility for Nasdaq-100 index futures," Managerial Finance, Emerald Group Publishing, vol. 38(8), pages 752-767, August.

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