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Pricing Volatility of Stock Returns with Volatile and Persistent Components

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  • Jie Zhu

    () (School of Economics and Management, University of Aarhus, Denmark and CREATES)

Abstract

In this paper a two-component volatility model based on the component's first moment is introduced to describe the dynamic of speculative return volatility. The two components capture the volatile and persistent part of volatility respectively. Then the model is applied to 10 Asia-Pacific stock markets. Their in-mean effects on return are also tested. The empirical results show that the persistent component accounts much more for volatility dynamic process than the volatile component. However the volatile component is found to be a significant pricing factor of asset returns for most markets, a positive or risk-premium effect exists between return and the volatile component, yet the persistent component is not significantly priced for return dynamic process.

Suggested Citation

  • Jie Zhu, 2008. "Pricing Volatility of Stock Returns with Volatile and Persistent Components," CREATES Research Papers 2008-14, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:create:2008-14
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    File URL: ftp://ftp.econ.au.dk/creates/rp/08/rp08_14.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Risk; Return; In-mean effect; Volatile; Persistent; Innovations;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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