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Macroeconomic determinants of stock volatility and volatility premiums

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

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 2 ()
Pages: 203-220

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Handle: RePEc:eee:moneco:v:60:y:2013:i:2:p:203-220
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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