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No news is good news: An asymmetric model of changing volatility

18 Jul 2011

Article by: John Y. Campbell, Ludger Hentschel
Published by: Journal of Financial Eronomics
Date: Mar 1992

“It seems plausible that an increase in stock market volatility raises required stock returns, and thus
lowers stock prices. We develop a formal model of this volatility feedback effect using a simple model
of changing variance (a quadratic generalized autoregressive conditionally heteroskedastic, or
QGARCH, model). Our model is asymmetric and helps to explain the negative skewness and excess
kurtosis of U.S. monthly and daily stock returns over the period 1926-88. We find that volatility
feedback normally has little effect on returns, but it can be important during periods of high
volatility.”

Full article (PDF): Link

 
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