IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v50y2015i06p1389-1414_00.html
   My bibliography  Save this article

Heterogeneity in Beliefs and Volatility Tail Behavior

Author

Listed:
  • Bakshi, Gurdip
  • Madan, Dilip
  • Panayotov, George

Abstract

We propose a model of volatility tail behavior in which investors display aversion to both low-volatility and high-volatility states, and hence, the derived pricing kernel exhibits an increasing and decreasing region in the volatility dimension. The model features investors who have heterogeneity in beliefs about volatility outcomes and maximize their utility by choosing volatility-contingent cash flows. Our empirical examination suggests that the model is better suited to reproduce data features in the left tail of the volatility distribution, both qualitatively and quantitatively.

Suggested Citation

  • Bakshi, Gurdip & Madan, Dilip & Panayotov, George, 2015. "Heterogeneity in Beliefs and Volatility Tail Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(6), pages 1389-1414, December.
    • Handle: RePEc:cup:jfinqa:v:50:y:2015:i:06:p:1389-1414_00
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109015000642/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Horatio Cuesdeanu & Jens Carsten Jackwerth, 2018. "The pricing kernel puzzle in forward looking data," Review of Derivatives Research, Springer, vol. 21(3), pages 253-276, October.
    2. Amengual, Dante & Xiu, Dacheng, 2018. "Resolution of policy uncertainty and sudden declines in volatility," Journal of Econometrics, Elsevier, vol. 203(2), pages 297-315.
    3. Bjørn Eraker & Aoxiang Yang, 2022. "The Price of Higher Order Catastrophe Insurance: The Case of VIX Options," Journal of Finance, American Finance Association, vol. 77(6), pages 3289-3337, December.
    4. Ruan, Xinfeng & Zhang, Jin E., 2021. "The economics of the financial market for volatility trading," Journal of Financial Markets, Elsevier, vol. 52(C).
    5. Horatio Cuesdeanu & Jens Carsten Jackwerth, 2018. "The pricing kernel puzzle: survey and outlook," Annals of Finance, Springer, vol. 14(3), pages 289-329, August.
    6. Agarwal, Vikas & Arisoy, Y. Eser & Naik, Narayan Y., 2017. "Volatility of aggregate volatility and hedge fund returns," Journal of Financial Economics, Elsevier, vol. 125(3), pages 491-510.
    7. Hongfei Tang & Xiaoqing Eleanor Xu, 2019. "Dissecting the tracking performance of regular and leveraged VIX ETPs," Review of Derivatives Research, Springer, vol. 22(2), pages 261-327, July.
    8. Cédric Gutierrez & Emmanuel Kemel, 2021. "Measuring natural source dependence," Working Papers hal-03330409, HAL.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:50:y:2015:i:06:p:1389-1414_00. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.