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Why are Stock Returns and Volatility Negatively Correlated?

SSRN Electronic Journal
2004
  • 7
    Citations
  • 5,429
    Usage
  • 2
    Captures
  • 0
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Citations
    7
    • Citation Indexes
      7
  • Usage
    5,429
    • Abstract Views
      4,517
    • Downloads
      912
  • Captures
    2
  • Ratings
    • Download Rank
      52,287

Article Description

The literature documents that low stock returns are associated with increased volatility, but two competing explanations have proved difficult to disentangle. A negative return increases leverage making equity value more volatile. However, volatility feedback increases the risk premium when a surprise rise in volatility is expected to persist. We follow Bekaert and Wu (2000) in controlling for leverage, but distinguish between volatility regimes that persist from less persistent changes using GARCH. Supporting volatility feedback, we find changes in volatility regime are reflected in stock returns, but not GARCH. Further, variation in leverage is not important in explaining volatility dynamics.

Bibliographic Details

Jinho Bae; Chang-Jin Kim; Charles R. Nelson

Elsevier BV

Asymmetric volatility; volatility reedback; leverage effect; regime switching; GARCH

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