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Asymmetric tail dependence between stock market returns and implied volatility

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  • Echaust, Krzysztof

Abstract

The main objective of this paper is to analyze tail dependence between returns and changes in implied volatility. We verify the asymmetry in dependence of positive and negative extreme returns with implied volatility. This empirical study is based on 678 series of options listed on the Warsaw Stock Exchange, in Poland during the period 2007 to 2018. We use a copula methodology and a nonparametric asymptotic dependence approach to estimate tail dependence. We find that changes in implied volatility are asymptotically independent on positive extreme returns and significantly dependent on negative extreme returns. The same asymmetry we obtained for call and put options regardless of their moneyness. The empirical evidence also suggests that implied volatility of put options rise more than that for call options in crash times and falls deeper in times of low volatility.

Suggested Citation

  • Echaust, Krzysztof, 2021. "Asymmetric tail dependence between stock market returns and implied volatility," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    • Handle: RePEc:eee:joecas:v:23:y:2021:i:c:s1703494920300372
    DOI: 10.1016/j.jeca.2020.e00190
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    Cited by:

    1. Małgorzata Just & Krzysztof Echaust, 2021. "An Optimal Tail Selection in Risk Measurement," Risks, MDPI, vol. 9(4), pages 1-16, April.
    2. Azimova, Tarana, 2022. "Modelling volatility transmission in regional Asian stock markets," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).
    3. Krzysztof Echaust & Małgorzata Just, 2021. "Tail Dependence between Crude Oil Volatility Index and WTI Oil Price Movements during the COVID-19 Pandemic," Energies, MDPI, vol. 14(14), pages 1-21, July.

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    More about this item

    Keywords

    Asymmetry; Tail dependence; Implied volatility; Extreme returns; Copula;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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