Department of Economics and Business Economics

Pricing Volatility of Stock Returns with Volatile and Persistent Components

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  • Jie Zhu, Denmark
  • School of Economics and Management
This paper introduces a two-component volatility model based on first moments of both components to describe the dynamics of speculative return volatility. The two components capture the volatile and the persistent part of volatility, respectively. The model is applied to 10 Asia-Pacific stock markets. Their in-mean effects on returns are tested. The empirical results show that the persistent component is much more important for the volatility dynamic process than is 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 the return and the volatile component, yet the persistent component is not significantly priced for the return dynamic process.
Original languageEnglish
JournalFinancial Markets and Portfolio Management
Publication statusPublished - 2009

    Research areas

  • Risk; Return; In-mean effect; Volatility; Long memory; Innovations

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