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Tail risk and the return-volatility relation

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  • Aboura, Sofiane
  • Chevallier, Julien

Abstract

This article brings new insights on the time-varying leverage and feedback effects in equity markets. The lead–lag return-volatility relation is examined by resorting to time-varying asymmetric dynamic conditional correlation models that allows for asymmetry (ADCC) and spillovers (ADCCX) with tail risk lagged variables (SKEW, VVIX) from 1990 to 2014. Empirical findings reveal that the dynamic leverage effect is the most influential in driving equity markets. The volatility of volatility (VVIX) exhibits a significant influence on the dynamic feedback effect only.

Suggested Citation

  • Aboura, Sofiane & Chevallier, Julien, 2018. "Tail risk and the return-volatility relation," Research in International Business and Finance, Elsevier, vol. 46(C), pages 16-29.
    • Handle: RePEc:eee:riibaf:v:46:y:2018:i:c:p:16-29
    DOI: 10.1016/j.ribaf.2016.07.036
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    More about this item

    Keywords

    Tail risk; Leverage effect; Feedback effect; Dynamic conditional correlation; VIX; SKEW; VVIX;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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