Abstract
The literature documents that low stock returns are associated with increased volatility, but two competing explanations have proved difficult to disentangle. A negative return increases leverage, making equity value more volatile. However, an increase in volatility that persists causes stock prices to drop. We follow Bekaert and Wu [Bekaert, G., Wu, G., 2000. Asymmetric volatility and risk in equity markets. Review of Financial Studies 13, 1-42.] in controlling for leverage, but distinguish between volatility regimes that persist from less persistent changes using GARCH. For post-World War II returns on the value-weighted portfolio of all NYSE stocks, we find that changes in the volatility regime are reflected in stock returns but not in GARCH.
| Original language | English |
|---|---|
| Pages (from-to) | 41-58 |
| Number of pages | 18 |
| Journal | Journal of Empirical Finance |
| Volume | 14 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 2007 Jan |
Bibliographical note
Funding Information:We are grateful for the comments from participants at the Workshop on Empirical Macroeconomics and Time Series Econometrics at the University of Washington, June 2001, Levis Kochin, Kamran Moinzadeh, Richard Startz and Eric Zivot, and particularly Geert Bekaert (editor) and the two anonymous referees. We also express appreciation for support from the Portland General Electric Company and the Ford and Louisa Van Voorhis endowment.
Copyright:
Copyright 2007 Elsevier B.V., All rights reserved.
Keywords
- Asymmetric volatility
- GARCH
- Leverage effect
- Regime switching
- Volatility feedback
ASJC Scopus subject areas
- Finance
- Economics and Econometrics