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Stock Returns, Implied Volatility Innovations, and the Asymmetric Volatility Phenomenon

Published online by Cambridge University Press:  06 April 2009

Patrick Dennis ,
Stewart Mayhew  and
Chris Stivers
Patrick Dennis
Affiliation:
[email protected], McIntire School of Commerce, University of Virginia, Charlottesville, VA 22904
Stewart Mayhew
Affiliation:
[email protected], Office of Economic Analysis, U.S. Securities and Exchange Commission, Washington, DC 20549
Chris Stivers
Affiliation:
[email protected], Department of Banking and Finance, Terry College of Business, University of Georgia, Athens, GA 30602.
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Abstract

We study the dynamic relation between daily stock returns and daily innovations in optionderived implied volatilities. By simultaneously analyzing innovations in index- and firmlevel implied volatilities, we distinguish between innovations in systematic and idiosyncratic volatility in an effort to better understand the asymmetric volatility phenomenon. Our results indicate that the relation between stock returns and innovations in systematic volatility (idiosyncratic volatility) is substantially negative (near zero). These results suggest that asymmetric volatility is primarily attributed to systematic market-wide factors rather than aggregated firm-level effects. We also present evidence that supports our assumption that innovations in implied volatility are good proxies for innovations in expected stock volatility.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 2 , June 2006 , pp. 381 - 406
Copyright
Copyright © School of Business Administration, University of Washington 2006

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