Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7388499 | Review of Financial Economics | 2017 | 38 Pages |
Abstract
This paper examines the relationship between volatility and the probability of occurrence of expected extreme returns in the Canadian market. Four measures of volatility are examined: implied volatility from firm option prices, conditional volatility calculated using an EGARCH model, idiosyncratic volatility, and expected shortfall. A significantly positive relationship is observed between a firm's idiosyncratic volatility and the probability of occurrence of an extreme return in the subsequent month for firms. A 10% increase in idiosyncratic volatility in a given month is associated with the probability of an extreme shock in the subsequent month (top or bottom 1.5% of the returns distribution) of 26.4%. Other firm characteristics, including firm age, price, volume and book-to-market ratio, are also shown to be significantly related to subsequent firm extreme returns. The effects of conditional and implied volatility are mixed. The E-GARCH and expected shortfall measures of conditional volatility are consistent with mean reversion: high short term realizations of conditional volatility foreshadow a lower probability of extreme returns.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Lorne N. Switzer, Cagdas Tahaoglu, Yun Zhao,