Asymmetric Volatility and Risk in Equity Markets / Geert Bekaert, Guojun Wu.

Format:

Book

Author/Creator:

Bekaert, Geert.

Contributor:

National Bureau of Economic Research.

Wu, Guojun.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6022.

NBER working paper series no. w6022

Language:

English

Subjects (All):

Asymmetry (Linguistics).

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Cambridge, Mass. : National Bureau of Economic Research, 1997.

Summary:

It appears that volatility in equity markets is asymmetric: returns and conditional volatility are negatively correlated. We provide a unified framework to simultaneously investigate asymmetric volatility at the firm and the market level and to examine two potential explanations of the asymmetry: leverage effects and time-varying risk premiums. Our empirical application uses the market portfolio and portfolios with different leverage constructed from Nikkei 225 stocks, extending the empirical evidence on asymmetry to Japanese stocks. Although volatility asymmetry is present and significant at the market and the portfolio levels, its source differs across portfolios. We find that it is important to include leverage ratios in the volatility dynamics but that their economic effects are mostly dwarfed by the volatility feedback mechanism. Volatility feedback is enhanced by a phenomenon that we term covariance asymmetry: conditional covariances with the market increase only significantly following negative market news. We do not find significant asymmetries in conditional betas.

Notes:

Print version record

April 1997.

Includes bibliographical references.