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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.

Suggested Citation

  • 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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    Cited by:

    1. Arulampalam, Wiji & Corradi, Valentina & Gutknecht, Daniel, 2014. "Modelling Heaped Duration Data: An Application to Neonatal Mortality," CAGE Online Working Paper Series 207, Competitive Advantage in the Global Economy (CAGE).
    2. Hartwell, Christopher A., 2014. "The impact of institutional volatility on financial volatility in transition economies : a GARCH family approach," BOFIT Discussion Papers 6/2014, Bank of Finland, Institute for Economies in Transition.
    3. Dendramis, Yiannis & Kapetanios, George & Tzavalis, Elias, 2014. "Level shifts in stock returns driven by large shocks," Journal of Empirical Finance, Elsevier, pages 41-51.
    4. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    5. Bollerslev, Tim & Xu, Lai & Zhou, Hao, 2015. "Stock return and cash flow predictability: The role of volatility risk," Journal of Econometrics, Elsevier, pages 458-471.
    6. Danielsson, Jon & Valenzuela, Marcela & Zer, Ilknur, 2016. "Learning from history: volatility and financial crises," LSE Research Online Documents on Economics 66046, London School of Economics and Political Science, LSE Library.
    7. Andrea Bastianin & Matteo Manera, 2015. "How Does Stock Market Volatility React to Oil Shocks?," Working Papers 2014.110, Fondazione Eni Enrico Mattei.
    8. Bua, Giovanna & Trecroci, Carmine, 2016. "International Equity Markets Interdependence: Bigger Shocks or Contagion in the 21st Century?," MPRA Paper 74771, University Library of Munich, Germany.
    9. Conrad, Christian & Loch, Karin, 2015. "The variance risk premium and fundamental uncertainty," Economics Letters, Elsevier, vol. 132(C), pages 56-60.
    10. Osazee Godwin Omorokunwa & Nosakhare Ikponmwosa, 2014. "Macroeconomic variables and stock price volatility in Nigeria," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 14(1), pages 259-268.
    11. Terence Tai-Leung Chong & Shiyu Lin, 2017. "Predictive models for disaggregate stock market volatility," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, pages 261-288.
    12. Chen, Jian & Jiang, Fuwei & Li, Hongyi & Xu, Weidong, 2016. "Chinese stock market volatility and the role of U.S. economic variables," Pacific-Basin Finance Journal, Elsevier, pages 70-83.
    13. repec:eee:eneeco:v:68:y:2017:i:c:p:240-254 is not listed on IDEAS
    14. Kaminska, Iryna & Roberts-Sklar, Matt, 2015. "A global factor in variance risk premia and local bond pricing," Bank of England working papers 576, Bank of England.
    15. Mele, Antonio & Obayashi, Yoshiki & Shalen, Catherine, 2015. "Rate fears gauges and the dynamics of fixed income and equity volatilities," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 256-265.

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