Is Volatility Clustering of Asset Returns Asymmetric?

Posted: 26 Jan 2015

See all articles by Cathy Ning

Cathy Ning

Ryerson University

Dinghai Xu

Independent

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Date Written: January 25, 2015

Abstract

Volatility clustering is a well-known stylized feature of financial asset returns. This paper investigates asymmetric pattern in volatility clustering by employing a univariate copula approach of Chen and Fan (2006). Using daily realized kernel volatilities constructed from high frequency data from stock and foreign exchange markets, we find evidence that volatility clustering is highly nonlinear and strongly asymmetric in that clusters of high volatility occur more often than clusters of low volatility. To the best of our knowledge, this paper is the first one to address and uncover this phenomenon. In particular, the asymmetry in volatility clustering is found to be more pronounced in the stock markets than in the foreign exchange markets. Further, the volatility clusters are shown to remain persistent for over a month and asymmetric across different time periods. Our findings have important implications for risk management. A simulation study indicates that models which accommodate asymmetric volatility clustering can significantly improve the out-of-sample forecasts of Value-at-Risk.

Keywords: Volatility clustering, Univariate time series copulas, Realized kernel volatility, Value-at-Risk

JEL Classification: C51, G32

Suggested Citation

Ning, Cathy and Xu, Dinghai and Wirjanto, Tony S., Is Volatility Clustering of Asset Returns Asymmetric? (January 25, 2015). Journal of Banking and Finance, Vol. 52, 2015, Available at SSRN: https://ssrn.com/abstract=2555266

Cathy Ning (Contact Author)

Ryerson University ( email )

350 Victoria Street
Toronto, Ontario M5B 2K3
Canada
416-979-5000 ext. 6181 (Phone)
(416) 598-5916 (Fax)

HOME PAGE: http://www.ryerson.ca/economics/faculty/ningc.html

Dinghai Xu

Independent ( email )

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
370
PlumX Metrics