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Which Effect Drives the Equity Market during Stress Periods?

Author

Listed:
  • Sofiane Aboura

    (CEREG - Centre de Recherche sur la gestion et la Finance - DRM UMR 7088 - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique, DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

Asymmetric volatility occupies a central role in the risk-return relation. However, this asymmetry has not been examined during stress periods. This article fills this gap by studying this relation at the tail distribution level with an empirical test on the French market from the creation of the implied volatility index in October 1997 until January 2013. Using a complete set of econometrical analysis before applying the multivariate extreme value theory, this article shows that the asymptotic dependence occurs only for the crash scenario in which the feedback effect dominates the leverage effect. This result has implications on the pricing and hedging of options contracts.

Suggested Citation

  • Sofiane Aboura, 2015. "Which Effect Drives the Equity Market during Stress Periods?," Post-Print halshs-01348718, HAL.
    • Handle: RePEc:hal:journl:halshs-01348718
    DOI: 10.15609/annaeconstat2009.119-120.269
    as

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