Advanced Search
MyIDEAS: Login to save this article or follow this journal

A behavioral explanation for the negative asymmetric return-volatility relation

Contents:

Author Info

  • Hibbert, Ann Marie
  • Daigler, Robert T.
  • Dupoyet, Brice
Registered author(s):

    Abstract

    We examine the short-term dynamic relation between the S&P 500 (Nasdaq 100) index return and changes in implied volatility at both the daily and intraday level. Neither the leverage hypothesis nor the volatility feedback hypothesis adequately explains the results. Alternatively, we propose that the behavior of traders (from the representativeness, affect, and extrapolation bias concepts of behavioral finance) is consistent with our empirical results of a strong daily and intraday negative return-implied volatility relation. Moreover, both the presence and magnitude of the negative relation and the asymmetry between return and implied volatility are most closely associated with extreme changes in the index returns. We also show that the strength of the relation is consistent with the implied volatility skew.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/B6VCY-4RP0MKK-2/2/39d9a7775dcd582c15448dfc9f0aee9c
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 10 (October)
    Pages: 2254-2266

    as in new window
    Handle: RePEc:eee:jbfina:v:32:y:2008:i:10:p:2254-2266

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Return-volatility relation Behavioral finance Leverage hypothesis Volatility feedback hypothesis VIX;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. John Y. Campbell & Ludger Hentschel, 1991. "No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns," NBER Working Papers 3742, National Bureau of Economic Research, Inc.
    2. Poterba, James M & Summers, Lawrence H, 1986. "The Persistence of Volatility and Stock Market Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 76(5), pages 1142-51, December.
    3. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, American Finance Association, vol. 48(5), pages 1749-78, December.
    4. Kim, Dongcheol & Kon, Stanley J, 1994. "Alternative Models for the Conditional Heteroscedasticity of Stock Returns," The Journal of Business, University of Chicago Press, vol. 67(4), pages 563-98, October.
    5. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," NBER Working Papers 8160, National Bureau of Economic Research, Inc.
    6. Geert Bekaert & Guojun Wu, 1997. "Asymmetric Volatility and Risk in Equity Markets," NBER Working Papers 6022, National Bureau of Economic Research, Inc.
    7. Wu, Guojun, 2001. "The Determinants of Asymmetric Volatility," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 14(3), pages 837-59.
    8. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, Elsevier, vol. 10(4), pages 407-432, December.
    9. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, American Finance Association, vol. 48(5), pages 1779-1801, December.
    10. Nicolas P. B. Bollen & Robert E. Whaley, 2004. "Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?," Journal of Finance, American Finance Association, American Finance Association, vol. 59(2), pages 711-753, 04.
    11. Dennis, Patrick & Mayhew, Stewart & Stivers, Chris, 2006. "Stock Returns, Implied Volatility Innovations, and the Asymmetric Volatility Phenomenon," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 41(02), pages 381-406, June.
    12. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, Elsevier, vol. 61(1), pages 43-76, July.
    13. Tauchen, George & Zhang, Harold & Liu, Ming, 1996. "Volume, volatility, and leverage: A dynamic analysis," Journal of Econometrics, Elsevier, Elsevier, vol. 74(1), pages 177-208, September.
    14. Cheekiat Low, 2004. "The Fear and Exuberance from Implied Volatility of S&P 100 Index Options," The Journal of Business, University of Chicago Press, vol. 77(3), pages 527-546, July.
    15. Tim Bollerslev & Julia Litvinova & George Tauchen, 2006. "Leverage and Volatility Feedback Effects in High-Frequency Data," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(3), pages 353-384.
    16. Bollerslev, Tim & Zhou, Hao, 2006. "Volatility puzzles: a simple framework for gauging return-volatility regressions," Journal of Econometrics, Elsevier, Elsevier, vol. 131(1-2), pages 123-150.
    17. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, American Finance Association, vol. 44(5), pages 1115-53, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. D.E. Allen & Abhay K Singh & R. Powell & Michael McAleer & James Taylor & Lyn Thomas, 2012. "The Volatility-Return Relationship: Insights from Linear and Non-Linear Quantile Regressions," Documentos de Trabajo del ICAE 2012-24, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    2. WanChun Luo & Rui Liu, 2011. "Analysis of meat price volatility in China," China Agricultural Economic Review, Emerald Group Publishing, Emerald Group Publishing, vol. 3(3), pages 402-411, September.
    3. Sofiane Aboura & Julien Chevallier, 2012. "Leverage vs. Feedback: Which Effect Drives the Oil Market?," Working Papers halshs-00720156, HAL.
    4. Maria Gonzalez-Perez & Alfonso Novales, 2011. "The information content in a volatility index for Spain," SERIEs, Spanish Economic Association, vol. 2(2), pages 185-216, June.
    5. Chiang, Min-Hsien & Huang, Hsin-Yi, 2011. "Stock market momentum, business conditions, and GARCH option pricing models," Journal of Empirical Finance, Elsevier, Elsevier, vol. 18(3), pages 488-505, June.
    6. Bedendo, Mascia & Hodges, Stewart D., 2009. "The dynamics of the volatility skew: A Kalman filter approach," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(6), pages 1156-1165, June.
    7. Maria Angeles Carnero Fernandez & Ana Pérez & Esther Ruiz Ortega, 2014. "Identification of asymmetric conditional heteroscedasticity in the presence of outliers," Statistics and Econometrics Working Papers, Universidad Carlos III, Departamento de Estadística y Econometría ws141912, Universidad Carlos III, Departamento de Estadística y Econometría.
    8. Lee, Bong Soo & Ryu, Doojin, 2013. "Stock returns and implied volatility: A new VAR approach," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 7(3), pages 1-20.
    9. Gurevich, Gregory & Kliger, Doron & Levy, Ori, 2009. "Decision-making under uncertainty - A field study of cumulative prospect theory," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(7), pages 1221-1229, July.
    10. Dirk G Baur & Thomas Dimpfl, 2012. "State-dependent Momentum in International Stock Markets," Working Paper Series, Finance Discipline Group, UTS Business School, University of Technology, Sydney 169, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    11. David E. Allen & Abhay K. Singh & Robert J. Powell & Michael McAleer & James Taylor & Lyn Thomas, 2013. "Return-Volatility Relationship: Insights from Linear and Non-Linear Quantile Regression," Tinbergen Institute Discussion Papers 13-020/III, Tinbergen Institute.
    12. Yao, Jing & Li, Duan, 2013. "Prospect theory and trading patterns," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(8), pages 2793-2805.
    13. 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, Emerald Group Publishing, vol. 38(8), pages 752-767, August.
    14. Park, Beum-Jo, 2014. "Time-varying, heterogeneous risk aversion and dynamics of asset prices among boundedly rational agents," Journal of Banking & Finance, Elsevier, Elsevier, vol. 43(C), pages 150-159.
    15. Xiuping Mao & Esther Ruiz & Helena Veiga, 2013. "One for all : nesting asymmetric stochastic volatility models," Statistics and Econometrics Working Papers, Universidad Carlos III, Departamento de Estadística y Econometría ws131110, Universidad Carlos III, Departamento de Estadística y Econometría.
    16. David E. Allen & Abhay K. Singh & Robert J. Powell & Michael McAleer & James Taylor & Lyn Thomas, 2013. "Return-Volatility Relationship: Insights from Linear and Non-Linear Quantile Regression," Tinbergen Institute Discussion Papers 13-020/III, Tinbergen Institute.
    17. Dunis, Christian & Kellard, Neil M. & Snaith, Stuart, 2013. "Forecasting EUR–USD implied volatility: The case of intraday data," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 4943-4957.
    18. Cordis, Adriana S. & Kirby, Chris, 2014. "Discrete stochastic autoregressive volatility," Journal of Banking & Finance, Elsevier, Elsevier, vol. 43(C), pages 160-178.
    19. Łukasz Kwiatkowski, 2011. "Bayesian Analysis of a Regime Switching In-Mean Effect for the Polish Stock Market," Central European Journal of Economic Modelling and Econometrics, CEJEME, CEJEME, vol. 3(4), pages 187-219, December.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:32:y:2008:i:10:p:2254-2266. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.