Supported by the Fundamental Research Funds for the Central Universities, and the Research Funds of Renmin University of China (No.11XNK003).
RISK PERCEPTION AND EQUITY RETURNS: EVIDENCE FROM THE SPX AND VIX
Article first published online: 7 NOV 2011
© 2011 Board of Trustees of the Bulletin of Economic Research and John Wiley & Sons Ltd
Bulletin of Economic Research
Volume 66, Issue 1, pages 20–44, January 2014
How to Cite
Gang, J. and Li, X. (2014), RISK PERCEPTION AND EQUITY RETURNS: EVIDENCE FROM THE SPX AND VIX. Bulletin of Economic Research, 66: 20–44. doi: 10.1111/j.1467-8586.2011.00409.x
- Issue published online: 2 DEC 2013
- Article first published online: 7 NOV 2011
- Fundamental Research Funds. Grant Number: 11XNK003
- conditional joint density;
- GARCH models;
We use the semi-nonparametric (SNP) model to study the relationship between the innovation of the Volatility Index (VIX) and the expected S&P 500 Index (SPX) returns. We estimate the one-step-ahead contemporaneous relation subject to leverage GARCH effect. Results agree with a body of newly established literature arguing non-linearity, and asymmetries. In addition, the risk-return behaviour depends on the signs as well as magnitudes of the perceived risk. We conclude that influence of fear or exuberance on the conditional market return is non-monotonic and hump-shaped. Very deep fear does not necessarily mean huge losses, instead, the loss may not be as bad as fears of normal levels. Results pass the robustness tests.