No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns
It seems plausible that an increase in stock market volatility raises required stock returns, and thus lowers stock prices. We develop a formal model of this volatility feedback effect using a simple model of changing variance (a quadratic generalized autoregressive conditionally heteroskedastic, or QGARCH, model). Our model is asymmetric and helps to explain the negative skewness and excess kurtosis of U.S. monthly and daily stock returns over the period 1926â€“1988. We find that volatility feedback normally has little effect on returns, but it can be important during periods of high volatility.
|Date of creation:||1992|
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|Publication status:||Published in Journal of Financial Economics|
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