Corradi, Valentina, Distaso, Walter and Mele, Antonio (2009) Macroeconomic determinants of stock market volatility and volatility risk-premiums. Working Paper. Social Science Research Network (SSRN). (Unpublished)

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Abstract

How does stock market volatility relate to the business cycle? We develop, and estimate, a no-arbitrage model to study the cyclical properties of stock volatility and the risk-premiums the market requires to bear the risk of uctuations in this volatility. The level of stock market volatility cannot be explained by the mere existence of the business cycle. Rather, it relates to the presence of some unobserved factor. At the same time, our model predicts that such an unobservable factor cannot explain the ups and downs stock volatility experiences over time - the "volatility of volatility." Instead, the volatility of stock volatility relates to the business cycle. Finally, volatility risk-premiums are strongly countercyclical, even more so than stock volatility, and are partially responsible for the large swings in the VIX index occurred during the 2007-2009 subprime crisis, which our model does capture in out-of-sample experiments.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Journal or Publication Title:	SSRN Electronic Journal
Publisher:	Social Science Research Network (SSRN)
ISSN:	1556-5068
Official Date:	October 2009
Dates:	Date Event October 2009 ["eprint_fieldopt_dates_date_type_available" not defined]
DOI:	10.2139/ssrn.2005021
Status:	Not Peer Reviewed
Publication Status:	Unpublished
Funder:	Economic and Social Research Council (ESRC)
Grant number:	RES-062-23-0311, EP/C522958/1

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