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Macroeconomic determinants of stock volatility and volatility premiums

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  • Corradi, Valentina
  • Distaso, Walter
  • Mele, Antonio

Abstract

How does stock market volatility relate to the business cycle? We develop, and estimate, a no-arbitrage model, and find that (i) the level and fluctuations of stock volatility are largely explained by business cycle factors and (ii) some unobserved factor contributes to nearly 20% to the overall variation in volatility, although not to its ups and downs. Instead, this “volatility of volatility” relates to the business cycle. Finally, volatility risk-premiums are strongly countercyclical, even more than stock volatility, and partially explain the large swings of the VIX index during the 2007–2009 subprime crisis, which our model captures in out-of-sample experiments.

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  • Corradi, Valentina & Distaso, Walter & Mele, Antonio, 2013. "Macroeconomic determinants of stock volatility and volatility premiums," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 203-220.
    • Handle: RePEc:eee:moneco:v:60:y:2013:i:2:p:203-220
    DOI: 10.1016/j.jmoneco.2012.10.019
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