Why are stock returns and volatility negatively correlated? [An article from: Journal of Empirical Finance]

This digital document is a journal article from Journal of Empirical Finance, published by Elsevier in 2007. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
The literature documents that low stock returns are associated with increased volatility, but two competing explanations have proved difficult to disentangle. A negative return increases leverage, making equity value more volatile. However, an increase in volatility that persists causes stock prices to drop. We follow Bekaert and Wu [Bekaert, G., Wu, G., 2000. Asymmetric volatility and risk in equity markets. Review of Financial Studies 13, 1-42.] in controlling for leverage, but distinguish between volatility regimes that persist from less persistent changes using GARCH. For post-World War II returns on the value-weighted portfolio of all NYSE stocks, we find that changes in the volatility regime are reflected in stock returns but not in GARCH.