The determinants of the model-free positive and negative volatilities

Bevilacqua, Mattia, Morelli, David and Tunaru, Radu (2019) The determinants of the model-free positive and negative volatilities. Journal of International Money and Finance, 92. pp. 1-24. ISSN 0261-5606

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Abstract

In this paper we analyze the role of macroeconomic and financial determinants in explaining stock market volatilities in the U.S. market. Both implied and realized volatility are computed model-free and decomposed into positive and negative components, thereby allowing us to compute directional volatility risk premia. We capture the behaviour of each component of implied volatility and risk premium in relation to their different determinants. The negative implied volatility appears to be linked more towards financial conditions variables such as uncertainty and geopolitical risk indexes, whereas positive implied volatility is driven more by macro variables such as inflation and GDP. There is a clear shift in importance from macro towards financial determinants moving from the pre towards the post financial crisis. A mixed frequency Granger causality approach uncovers causality relationships between volatilities and risk premia and macro variables and vice versa, a finding which is not detected with a conventional low frequency VAR model.

Item Type: Article
Keywords: Implied Volatility, Risk Premia, Macro Variables, Financial Variables, Granger Causality, Mixed Frequency
Schools and Departments: School of Business, Management and Economics > Accounting and Finance
Research Centres and Groups: Business and Finance Research Group
Subjects: H Social Sciences > HG Finance > HG0101 Theory. Method. Relation to other subjects
H Social Sciences > HG Finance > HG4001 Finance management. Business finance. Corporation finance
Depositing User: Radu Tunaru
Date Deposited: 03 Feb 2020 10:28
Last Modified: 03 Feb 2020 10:30
URI: http://sro.sussex.ac.uk/id/eprint/89688

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