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Macroeconomic determinants of stock volatility and volatility premiums

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Corradi, Valentina, Distaso, Walter and Mele, Antonio (2012) Macroeconomic determinants of stock volatility and volatility premiums. Journal of Monetary Economics, Volume 60 (Number 2). pp. 203-220. doi:10.1016/j.jmoneco.2012.10.019 ISSN 0304-3932.

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Official URL: http://dx.doi.org/10.1016/j.jmoneco.2012.10.019

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Abstract

How does stock market volatility relate to the business cycle? We develop, and estimate, a no-arbitrage model, and find that (i) the level and fluctuations of stock volatility are largely explained by business cycle factors and (ii) some unobserved factor contributes to nearly 20% to the overall variation in volatility, although not to its ups and downs. Instead, this “volatility of volatility” relates to the business cycle. Finally, volatility risk-premiums are strongly countercyclical, even more than stock volatility, and partially explain the large swings of the VIX index during the 2007–2009 subprime crisis, which our model captures in out-of-sample experiments.

Item Type: Journal Article
Divisions: Faculty of Social Sciences > Economics
Journal or Publication Title: Journal of Monetary Economics
Publisher: Elsevier BV
ISSN: 0304-3932
Official Date: 2012
Dates:
DateEvent
2012Published
Volume: Volume 60
Number: Number 2
Page Range: pp. 203-220
DOI: 10.1016/j.jmoneco.2012.10.019
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

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