ARE VOLATILITY EXPECTATIONS CHARACTERIZED BY REGIME SHIFTS? EVIDENCE FROM IMPLIED VOLATILITY INDICES



Are Volatility Expectations Characterized by Regime Shifts?

Evidence from Implied Volatility Indices*

Kazuhiko Nishina

Osaka University, Japan

Nabil Maghrebi **

Wakayama University, Japan

Mark J. Holmes

Waikato University, New Zealand

ABSTRACT

This paper examines nonlinearities in the dynamics of volatility
expectations using benchmarks of implied volatility for the US and
Japanese markets. The evidence from Markov regime-switching models
suggests that volatility expectations are likely to be governed by regimes
featuring a long memory process and significant leverage effects. Market
volatility is expected to increase in bear periods and decrease in bull
periods. Leverage effects constitute thus an important source of
nonlinearities in volatility expectations. There is no evidence of long
swings associated with financial crises, which do not have the potential of
shifting volatility expectations from one regime to another for long
protracted periods.

JEL Classification: C32, C51, G13, G15

Keywords: Markov Regime Switching, Implied Volatility Index, Nonlinear Modelling.

* Acknowledgement: The authors acknowledge with thanks the Grants-in-Aid for Scientific
Research
No. 18330069 by the Japan Society for the Promotion of Science and the
provision of options database by Osaka Securities Exchange.

** Corresponding author: Nabil Maghrebi, Graduate School of Economics, Wakayama
University, Sakaedani
930 Wakayama 640-8510, Japan. Tel: +81-73-457-7658, Fax:
+81-73-457-7659. Email: [email protected]



More intriguing information

1. The name is absent
2. The name is absent
3. Using Surveys Effectively: What are Impact Surveys?
4. Fiscal Reform and Monetary Union in West Africa
5. The Advantage of Cooperatives under Asymmetric Cost Information
6. MULTIPLE COMPARISONS WITH THE BEST: BAYESIAN PRECISION MEASURES OF EFFICIENCY RANKINGS
7. The effect of classroom diversity on tolerance and participation in England, Sweden and Germany
8. The Making of Cultural Policy: A European Perspective
9. The Macroeconomic Determinants of Volatility in Precious Metals Markets
10. Text of a letter