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Sign and size asymmetry in the stock returns-implied volatility relationship

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  • Fousekis, Panos

Abstract

This work investigates the relation between stock returns and changes in risk perceptions using data from four pairs of stock and implied volatility indices and the non-parametric local regression approach. The results show that the association between the two variables is negative, contemporaneous, non-linear, and asymmetric with respect to the sign and to the size of stock returns. The underlying relationship for the stock markets in the EU, in the USA, and (to a large extent) in Australia has a reverse S-shape something that contrasts sharply with the theoretical postulates of fear and exuberance. The results from the Chinese market, however, are mixed; they support the fear postulate but not the exuberance one.

Suggested Citation

  • Fousekis, Panos, 2020. "Sign and size asymmetry in the stock returns-implied volatility relationship," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    • Handle: RePEc:eee:joecas:v:21:y:2020:i:c:s1703494920300098
    DOI: 10.1016/j.jeca.2020.e00162
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    2. Ahmed, Bouteska, 2020. "Understanding the impact of investor sentiment on the price formation process: A review of the conduct of American stock markets," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
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    5. Echaust, Krzysztof, 2021. "Asymmetric tail dependence between stock market returns and implied volatility," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).

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    More about this item

    Keywords

    Stock returns; Implied volatility; Non-linearity; Asymmetry;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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