New volatility evolution model after extreme events
Abstract
In this paper, we propose a new dynamical model to study the two-stage volatility evolution of stock market index after extreme events, and find that the volatility after extreme events follows a stretched exponential decay in the initial stage and becomes a power law decay at later times by using high frequency minute data. Empirical study of the evolutionary behaviors of volatility after endogenous and exogenous events further demonstrates the descriptive power of our new model. To further explore the underlying mechanisms of volatility evolution, we introduce the sequential arrival of information hypothesis (SAIH) and the mixture of distribution hypothesis (MDH) to test the two-stage assumption, and find that investors transform from the uninformed state to the informed state in the first stage and informed investors subsequently dominate in the second stage. The testing results offer a supporting explanation for the validity of our new model and the fitted values of relevant parameters.
Keywords
Cite
@article{arxiv.2201.03213,
title = {New volatility evolution model after extreme events},
author = {Mei-Ling Cai and Zhang-HangJian Chen and Sai-Ping Li and Xiong Xiong and Wei Zhang and Ming-Yuan Yang and Fei Ren},
journal= {arXiv preprint arXiv:2201.03213},
year = {2022}
}