Logo Logo

Exploring Return Dynamics via Corridor Implied Volatility, Review of Financial Studies

Abstract

A number of fundamental questions regarding the equity-index return dynamics are difficult to address due to the latent character of spot volatility. We exploit tick-by-tick option quotes to compute a novel "Corridor Implied Volatility," or CX, index which may serve as an observable proxy for short-term volatility. Exploiting this index, we obtain striking new empirical findings. In particular, equity-index volatility jumps are common and they are symmetrically distributed and co-jump with the underlying returns. Moreover, the return-volatility asymmetry, or leverage effect, is more pronounced than generally recognized and is in force for both diffusive and jump innovations in volatility. Finally, the CX index performs admirably during turbulent market conditions so it constitutes a useful real-time gauge of market stress.

Type

Article

Author(s)

Torben Andersen, Oleg Bondarenko, Maria Gonzalez-Perez

Date Published

2015

Citations

Andersen, Torben, Oleg Bondarenko, and Maria Gonzalez-Perez. 2015. Exploring Return Dynamics via Corridor Implied Volatility. Review of Financial Studies. 28(10): 2902-2945.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more