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Extreme asymmetric volatility: Stress and aggregate asset prices

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  • Aboura, Sofiane
  • Wagner, Niklas

Abstract

Asymmetric volatility in equity markets has been widely documented in finance (Bekaert and Wu, 2000)). We study asymmetric volatility for daily S&P 500 index returns and VIX index changes, thereby examining the relation between extreme changes in risk-neutral volatility expectations, i.e. market stress, and aggregate asset prices. To this aim, we model market returns, implied VIX market volatility and volatility of volatility, showing that the latter is asymmetric in that past positive volatility shocks drive positive shocks to volatility of volatility. Our main result documents the existence of a significant extreme asymmetric volatility effect as we find contemporaneous volatility-return tail dependence for crashes but not for booms. We then outline aggregate market price implications of extreme asymmetric volatility, indicating that under volatility feedback a one-in-a-hundred trading day innovation to average VIX implied volatility, for example, relates to an expected market drop of more than 4 percent.

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  • Aboura, Sofiane & Wagner, Niklas, 2016. "Extreme asymmetric volatility: Stress and aggregate asset prices," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 47-59.
    • Handle: RePEc:eee:intfin:v:41:y:2016:i:c:p:47-59
    DOI: 10.1016/j.intfin.2015.12.004
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    10. Kim, Jong-Min & Jung, Hojin, 2017. "Can asymmetric conditional volatility imply asymmetric tail dependence?," Economic Modelling, Elsevier, vol. 64(C), pages 409-418.
    11. Nuno Silva, 2015. "Industry based equity premium forecasts," GEMF Working Papers 2015-19, GEMF, Faculty of Economics, University of Coimbra.
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