Date of Completion

Spring 5-1-2019

Thesis Advisor(s)

Paul Gilson

Honors Major



Finance and Financial Management


This paper attempts to explain the negative correlation between stock market returns in the United States (measured by the risk premium of the S&P 500 Index) and the respective volatility of these returns. The academic research regarding two primary schools of thought on this issue, the volatility feedback effect and the leverage effect, is furthered as potential explanations for this phenomenon. A tertiary explanation relating to investor behavior is also explored as a viable cause. In order to empirically study this relationship, I examine the risk premium quintiles and the corresponding CBOE Volatility Index levels for the time-series dating from January 2, 1990 to June 29, 2018. This approach differentiates from the stochastic and autoregressive volatility models that attempt to explain this relationship, by examining the distribution of the negative return-volatility correlation. Results from this analysis serve to better understand the properties of volatility and their impact on investments.