Asymmetric Response of Volatility: Evidence from Stochastic Volatility Models and Realized Volatility
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 unified 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 flexible 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 findings.
Bayes factors; Leverage effect; Markov chain Monte Carlo; EGARCH; Realized volatility; Asymmetric volatility
Applied Statistics | Econometrics
2004 Financial Econometrics Symposium
Asymmetric Response of Volatility: Evidence from Stochastic Volatility Models and Realized Volatility. (2004). 2004 Financial Econometrics Symposium. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/839