IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Nonlinear Adjustments of Volatility Expectations to Forecast Errors: Evidence from Markov-Regime Switches in Implied Volatility

Listed author(s):
  • Kazuhiko Nishina

    (Faculty of Economics, Meiji Gakuin University, Japan; Center for the Study of Finance and Insurance, Osaka University, Japan)

  • Nabil Maghrebi

    (Graduate School of Economics, Wakayama University, Japan; Center for the Study of Finance and Insurance, Osaka University, Japan)

  • Mark J. Holmes


    (Department of Economics, Waikato University Management School, Private Bag 3105, Hamilton 3240, New Zealand)

This paper tests for nonlinearities in the behavior of volatility expectations based on model-free implied volatility indices. Using Markov regime-switching models, the empirical evidence from the German, Japanese and U.S. markets suggests that there are indeed regime-specific levels of volatility expectations. Whereas the regimes seem to be governed by the degree of serial correlation and adjustment to forecast errors, there is no evidence of significant leverage effects. The frequency of regime shifts in volatility expectations is affected by the onset of financial crises, which have the effect of increasing the likelihood of regimes driven by lower autoregressive effects and faster speeds of adjustment. The evidence suggests that despite the heterogeneous beliefs of market participants, implied volatility indices provide a measure of consensus expectations that can be useful in understanding the nonlinear behavior of volatility expectations during periods of financial instability.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Access to full text is restricted to subscribers.

File URL:
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

Volume (Year): 15 (2012)
Issue (Month): 03 ()
Pages: 1-23

in new window

Handle: RePEc:wsi:rpbfmp:v:15:y:2012:i:03:p:1250007-1-1250007-23
Contact details of provider: Web page:

Order Information: Email:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wsi:rpbfmp:v:15:y:2012:i:03:p:1250007-1-1250007-23. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.