Asymmetric and negative return-volatility relation: a behavioural explanation
by Mouna Boujelbène-Abbes; Ines Ben Salah; Abderrazak Ellouze
International Journal of Economics and Business Research (IJEBR), Vol. 6, No. 3, 2013

Abstract: In this study we investigate the return-implied volatility relationship in the French market by considering the behavioural biases of representativeness, extrapolation and affect. We find a strong evidence of negative and asymmetric return-implied volatility relationship at daily frequency, which cannot be explained adequately through leverage and volatility feedback hypotheses. However, the study of this relation through behavioural perspective shows that the representativeness, affect, and extrapolation heuristics constitute a confirmed explanation of the asymmetric return-volatility relationship in the French market. The annual study of the relation show that is more pronounced in the 2007-2008 period characterised by the occurrence of the subprime crisis. Moreover, our results indicate that the relationship is more pronounced for extreme negative stock market returns.

Online publication date: Mon, 30-Dec-2013

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