The University of Southampton
University of Southampton Institutional Repository

An analytical review of volatility metrics for bubbles and crashes

An analytical review of volatility metrics for bubbles and crashes
An analytical review of volatility metrics for bubbles and crashes
Bubbles and crashes have long been an important area of research that has not yet led to a comprehensive theoretical or empirical understanding of how to define, measure, and compare such extreme market events. Highlights of the vast literature on bubbles, crashes, and volatility are surveyed and a promising direction for future research, based on a theory of short-side rationing, is described. The theory suggests that, especially in extreme market conditions, marginal quantities held or not held become transactionally more important than the prices paid or received. Our approach is empirically implemented by fitting monthly elasticity of returns variances to an exponential expression. From this there then follows a comparisons of changes in implied versus realized volatility, generation of an Extreme Events Line (EEL), and a crash intensity comparison metric. These methods open a new perspective from which it is possible to analyze bubble and crash events as applied to different time scales and asset classes that include bonds, real estate, foreign exchange, and commodities.
bubbles, crashes, elasticity of variance, extreme events line, herding, tranquility zone, volatility
1057-5219
15-28
Vogel, Harold
52631322-3a03-49cc-b9e7-4db3b2a727f5
Werner, Richard A.
dc217378-eb19-4592-9be4-ab5f847b74a1
Vogel, Harold
52631322-3a03-49cc-b9e7-4db3b2a727f5
Werner, Richard A.
dc217378-eb19-4592-9be4-ab5f847b74a1

Vogel, Harold and Werner, Richard A. (2015) An analytical review of volatility metrics for bubbles and crashes. International Review of Financial Analysis, 38, 15-28. (doi:10.1016/j.irfa.2014.11.003).

Record type: Article

Abstract

Bubbles and crashes have long been an important area of research that has not yet led to a comprehensive theoretical or empirical understanding of how to define, measure, and compare such extreme market events. Highlights of the vast literature on bubbles, crashes, and volatility are surveyed and a promising direction for future research, based on a theory of short-side rationing, is described. The theory suggests that, especially in extreme market conditions, marginal quantities held or not held become transactionally more important than the prices paid or received. Our approach is empirically implemented by fitting monthly elasticity of returns variances to an exponential expression. From this there then follows a comparisons of changes in implied versus realized volatility, generation of an Extreme Events Line (EEL), and a crash intensity comparison metric. These methods open a new perspective from which it is possible to analyze bubble and crash events as applied to different time scales and asset classes that include bonds, real estate, foreign exchange, and commodities.

Text
IRFA 2014 Vogel Werner Volatility Metrics Bubbles Crashes.pdf - Accepted Manuscript
Download (555kB)

More information

Accepted/In Press date: 1 November 2014
e-pub ahead of print date: 13 December 2014
Published date: March 2015
Keywords: bubbles, crashes, elasticity of variance, extreme events line, herding, tranquility zone, volatility
Organisations: Centre of Excellence for International Banking, Finance & Accounting

Identifiers

Local EPrints ID: 372867
URI: http://eprints.soton.ac.uk/id/eprint/372867
ISSN: 1057-5219
PURE UUID: 69704a74-e616-4c85-b5a6-425e574c55c7

Catalogue record

Date deposited: 24 Dec 2014 12:10
Last modified: 15 Mar 2024 05:13

Export record

Altmetrics

Contributors

Author: Harold Vogel
Author: Richard A. Werner

Download statistics

Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.

View more statistics

Atom RSS 1.0 RSS 2.0

Contact ePrints Soton: eprints@soton.ac.uk

ePrints Soton supports OAI 2.0 with a base URL of http://eprints.soton.ac.uk/cgi/oai2

This repository has been built using EPrints software, developed at the University of Southampton, but available to everyone to use.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we will assume that you are happy to receive cookies on the University of Southampton website.

×