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Pricing Volatility of Stock Returns with Volatile and Persistent Components

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Author Info
Jie Zhu () (School of Economics and Management, University of Aarhus, Denmark and CREATES)

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Abstract

In this paper a two-component volatility model based on the component's first moment is introduced to describe the dynamic of speculative return volatility. The two components capture the volatile and persistent part of volatility respectively. Then the model is applied to 10 Asia-Pacific stock markets. Their in-mean effects on return are also tested. The empirical results show that the persistent component accounts much more for volatility dynamic process than the volatile component. However the volatile component is found to be a significant pricing factor of asset returns for most markets, a positive or risk-premium effect exists between return and the volatile component, yet the persistent component is not significantly priced for return dynamic process.

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Publisher Info
Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2008-14.

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Length: 50
Date of creation: 05 Mar 2008
Date of revision:
Handle: RePEc:aah:create:2008-14

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Web page: http://www.econ.au.dk/afn/

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Related research
Keywords: Risk; Return; In-mean effect; Volatile; Persistent; Innovations;

Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

This paper has been announced in the following NEP Reports:

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