As part of the series of the „Finance Research Seminar“, VGSF welcomes Leyla Han from Questrom School of Business, Boston University to present her research paper.
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Paper
Information-Driven Volatility
Standard asset pricing models with stochastic volatility predict a robust positive relationship between past realized volatility and future expected returns. Empirical work typically finds this relationship to be negative. We develop an asset pricing model where stock market volatility dynamics are driven by information. We show that under strong generalized risk sensitivity of preferences, information-driven volatility induces a negative correlation between past realized volatility and future expected returns. Using FOMC announcements and stock market jump days to identify information events, we provide empirical evidence for the unique implications of the information-driven volatility channel.
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