Are Volatility Expectations Characterized By Regime Shifts? Evidence From Implied Volatility Indices
AbstractThis paper examines nonlinearities in the dynamics of volatility expectations using benchmarks of implied volatility for the US and Japanese markets. The evidence from Markov regime-switching models suggests that volatility expectations are likely to be governed by regimes featuring a long memory process and significant leverage effects. Market volatility is expected to increase in bear periods and decrease in bull periods. Leverage effects constitute thus an important source of nonlinearities in volatility expectations. There is no evidence of long swings associated with financial crises, which do not have the potential of shifting volatility expectations from one regime to another for long protracted periods.
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Bibliographic InfoPaper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 06-20.
Length: 31 pages
Date of creation: Jul 2006
Date of revision:
Markov Regime Switching; Implied Volatility Index; Nonlinear Modelling.;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-28 (All new papers)
- NEP-CFN-2006-07-28 (Corporate Finance)
- NEP-ETS-2006-07-28 (Econometric Time Series)
- NEP-FIN-2006-07-28 (Finance)
- NEP-IFN-2006-07-28 (International Finance)
- NEP-SEA-2006-07-28 (South East Asia)
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