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

Jean-Marie Dufour, René Garcia, Abderrahim Taamouti: We provide evidence on two alternative mechanisms of interaction between returns and volatilities: the leverage effect and the volatility feedback effect.

Author(s):

Jean-Marie Dufour

Rene Garcia

EDHEC Business School

Abderrahim Taamouti

Universidad Carlos III de Madrid

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.

Type: Working paper
Date: le 06/06/2011
Research Cluster : Finance

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