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
15-28
Vogel, Harold
52631322-3a03-49cc-b9e7-4db3b2a727f5
Werner, Richard A.
dc217378-eb19-4592-9be4-ab5f847b74a1
March 2015
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, .
(doi:10.1016/j.irfa.2014.11.003).
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
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
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Date deposited: 24 Dec 2014 12:10
Last modified: 15 Mar 2024 05:13
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Contributors
Author:
Harold Vogel
Author:
Richard A. Werner
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