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The asymmetric response of volatility to market changes and the volatility smile: Evidence from Australian options

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  • Tanha, Hassan
  • Dempsey, Michael

Abstract

We document that in Australian markets, the impact on stock market volatility is higher following negative market shocks than following positive shocks of the same magnitude. We find that the implied volatility responses of in-the-money (ITM) options are consistent with the observed pattern. However, the implied volatilities of out-of-the-money (OTM) options are largely unresponsive to such shocks. We conclude that ITM options create different prospects for gains and losses compared with OTM options, and that the differences may be understood in relation to loss aversion behaviour. These different preferences and expectations explain the trend of the volatility smile as increasing implied volatility with in-the-moneyness.

Suggested Citation

  • Tanha, Hassan & Dempsey, Michael, 2015. "The asymmetric response of volatility to market changes and the volatility smile: Evidence from Australian options," Research in International Business and Finance, Elsevier, vol. 34(C), pages 164-176.
    • Handle: RePEc:eee:riibaf:v:34:y:2015:i:c:p:164-176
    DOI: 10.1016/j.ribaf.2015.02.003
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    Cited by:

    1. Anagnostopoulou, Seraina C. & Tsekrekos, Andrianos E., 2017. "Accounting quality, information risk and the term structure of implied volatility around earnings announcements," Research in International Business and Finance, Elsevier, vol. 41(C), pages 445-460.
    2. Ji, Qiang & Fan, Ying, 2016. "Modelling the joint dynamics of oil prices and investor fear gauge," Research in International Business and Finance, Elsevier, vol. 37(C), pages 242-251.
    3. Liu, Bing-Yue & Ji, Qiang & Fan, Ying, 2017. "Dynamic return-volatility dependence and risk measure of CoVaR in the oil market: A time-varying mixed copula model," Energy Economics, Elsevier, vol. 68(C), pages 53-65.
    4. Shekar Bose & Hafizur Rahman, 2022. "Are News Effects Necessarily Asymmetric? Evidence from Bangladesh Stock Market," SAGE Open, , vol. 12(4), pages 21582440221, October.
    5. Thakolsri, Supachok & Sethapramote, Yuthana & Jiranyakul, Komain, 2015. "Asymmetric volatility of the Thai stock market: evidence from high-frequency data," MPRA Paper 67181, University Library of Munich, Germany.

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    More about this item

    Keywords

    Behavioural finance; Asymmetric volatility; Implied volatility; Informational efficiency;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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