Department of Economics and Business Economics

Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

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    Final published version, 768 KB, PDF document

  • Tim Bollerslev
  • Natalia Sizova, Duke University, United States
  • George Tauchen, Duke University, United States
  • School of Economics and Management
Stock market volatility clusters in time, carries a risk premium, is fractionally inte-
grated, and exhibits asymmetric leverage effects relative to returns. This paper develops
a first internally consistent equilibrium based explanation for these longstanding
empirical facts. The model is cast in continuous-time and entirely self-contained, in-
volving non-separable recursive preferences. We show that the qualitative theoretical
implications from the new model match remarkably well with the distinct shapes and
patterns in the sample autocorrelations of the volatility and the volatility risk pre-
mium, and the dynamic cross-correlations of the volatility measures with the returns
calculated from actual high-frequency intra-day data on the S&P 500 aggregate market
and VIX volatility indexes.
Original languageEnglish
Place of publicationAarhus
PublisherAarhus Universitetsforlag
Number of pages49
Publication statusPublished - 2009

    Research areas

  • Equilibrium asset pricing; stochastic volatility; leverage effect; volatility feed-back; option implied volatility; realized volatility; variance risk premium.

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