Keywords
loss aversion, volatility clustering, conditional skewness
Abstract
We develop a preference-based equilibriumasset pricing model that explains low frequency conditional volatility. Similar to Barberis, Huang, and Santos (2001), agents in our model care about wealth changes, experience loss aversion, and keep a mental scorecard that a¤ects their level of risk aversion. A new feature of our model is that when perturbed by unexpected returns, investors become temporarily more sensitive to news. Gradually, investors become accustomed to the new level of wealth, restoring prior levels of risk aversion and news sensitivity. The state-dependent sensitivity to news creates the type of volatility clustering found in low frequency stock returns. We …nd empirical support for our model’s predictions that relate the scorecard to conditional volatility and skewness.
Original Publication Citation
“Whence GARCH? A Preference-Based Explanation for Conditional Volatility (with Grant McQueen),” 2004, Review of Financial Studies, 17, 915-949.
BYU ScholarsArchive Citation
McQueen, Grant and Vorkink, Keith, "Whence GARCH? A Preference-Based Explanation for Conditional Volatility" (2004). Faculty Publications. 9221.
https://scholarsarchive.byu.edu/facpub/9221
Document Type
Peer-Reviewed Article
Publication Date
2004
Publisher
Review of Financial Studies
Language
English
College
Marriott School of Business
Department
Finance
Copyright Use Information
https://lib.byu.edu/about/copyright/