Research and publications

Measuring High-Frequency Causality between Returns, Realised Volatility and Implied Volatility

We provide evidence on two alternative mechanisms of interaction between returns and volatilities: the leverage effect and the volatility feedback effect. We stress the importance of distinguishing between realised volatility and implied volatility, and find that implied volatilities are essential for assessing the volatility feedback effect. We also study the impact of news on returns and volatility. We introduce a concept of news based on the difference between implied and realised volatilities (the variance risk premium) and find that a positive variance risk premium has more impact on returns than a negative variance risk premium. A revisited version of this paper was published in the Winter 2012 issue of the Journal of Financial Econometrics.

Author(s):

Jean-Marie Dufour, René Garcia, Abderrahim Taamouti

Summary:

We provide evidence on two alternative mechanisms of interaction between returns and volatilities: the leverage effect and the volatility feedback effect. We stress the importance of distinguishing between realised volatility and implied volatility, and find that implied volatilities are essential for assessing the volatility feedback effect. We also study the impact of news on returns and volatility. We introduce a concept of news based on the difference between implied and realised volatilities (the variance risk premium) and find that a positive variance risk premium has more impact on returns than a negative variance risk premium. A revisited version of this paper was published in the Winter 2012 issue of the Journal of Financial Econometrics.

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Type :	Working paper
Date :	06/06/2011
Keywords :	Risk Management

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