Exploring Return Dynamics via Corridor Implied Volatility

Torben G. Andersen, Oleg Bondarenko*, Maria T. Gonzalez-Perez

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

35 Scopus citations

Abstract

Some fundamental questions regarding 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 Volatility" index which may serve as an observable proxy for short-Term volatility. Exploiting this index, we find that equity-index volatility jumps are common, symmetrically distributed, and cojump with the underlying returns. Moreover, the return-volatility asymmetry is more pronounced than is generally recognized and is in force for both diffusive and jump innovations in volatility. Finally, the index performs admirably during turbulent market conditions, constituting a useful real-Time gauge of market stress.

Original languageEnglish (US)
Pages (from-to)2902-2945
Number of pages44
JournalReview of Financial Studies
Volume28
Issue number10
DOIs
StatePublished - Oct 2015

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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