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Measuring High-Frequency Causality Between Returns, Realized Volatility, and Implied Volatility

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  • Jean-Marie Dufour
  • René Garcia
  • Abderrahim Taamouti

Abstract

We provide evidence on two alternative mechanisms of interaction between returns and volatilities: the leverage ef fect and the volatility feedback effect. We stress the importance of distinguishing between realized volatility and implied volatility and find that implied volatilities are essential for assessing the volatility feedback effect. We also study the impact of news on returns and volatility. We introduce a concept of news based on the difference between implied and realized volatilities (the variance risk premium) and find that a positive variance risk premium has more impact on returns than a negative variance risk premium. Copyright The Author 2011. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Jean-Marie Dufour & René Garcia & Abderrahim Taamouti, 2009. "Measuring High-Frequency Causality Between Returns, Realized Volatility, and Implied Volatility," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 10(1), pages 124-163, 2012 10 1.
  • Handle: RePEc:oup:jfinec:v:10:y:2009:i:1:p:124-163
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    1. repec:eee:eneeco:v:66:y:2017:i:c:p:194-204 is not listed on IDEAS
    2. repec:eee:riibaf:v:42:y:2017:i:c:p:124-148 is not listed on IDEAS

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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