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How Do Volatility and Return Series Interact?

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  • Söylemez, Arif Orçun

Abstract

Literature in the last forty years is swamped with a myriad of studies on the relationshipbetween asset returns and volatility. Although the correlation between these two variablesis already well-documented, our knowledge regarding their causal relationship remains limited. This study formally investigates the true dynamic relationship between the VIX implied volatility index and the S&P500 returns. Innovation accounting results indicate strong influence of S&P500 returns on VIX but not vice versa. Plus, unexpected S&P500 losses tend to increase VIX temporarily, while return shocks in general have permanent impact on VIX in the adverse direction of the shock.

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  • Söylemez, Arif Orçun, 2020. "How Do Volatility and Return Series Interact?," MPRA Paper 104687, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:104687
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    References listed on IDEAS

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    More about this item

    Keywords

    Volatility feedback hypothesis; Leverage effect; Endogeneity;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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