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This paper examines the asymmetric response of equity volatility to return shocks. We generalize the news impact function (NIF), originally introduced by Engle and Ng (1993) to study asymmetric volatility under the ARCH-type models, to be applicable to both stochastic volatility (SV) and ARCH-type models. Based on the generalized concept, we provide a uni…ed framework to examine asymmetric properties of volatility. A new asymmetric volatility model, which nests both ARCH and SV models and at the same time allows for a more ‡exible NIF, is proposed. Empirical results based on daily index return data support the classical asymmetric SV model with a monotonically decreasing NIF. This empirical result is further reinforced by the realized volatility obtained from high frequency intraday data. We document the option pricing implications of these …ndings.


Bayes factors; Leverage effect; Markov chain Monte Carlo; EGARCH; Realized volatility; Asymmetric volatility


Applied Statistics | Econometrics

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Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.