More evidence for asymmetric volatility-return correlations

· Realized returns positively correlate with volatility, when returns are positive · The correlations change from positive to negative, when returns are negative · As in Wang et al. (2017) , the evidence fits Prospect Theory’s reflection principle · The correlations show in cross-sectional and time series analyses of 353 stocks · The correlations emerge in daily, monthly, quarterly, half-yearly and yearly analyses Wang, H., Yan, J. and Yu, J. (2017) demonstrate that the risk-return correlations change from positive to negative depending on whether the stock has accrued capital gains or capital losses. The authors argue that Prospect Theory’s reflection principle provides the most convincing explanation to the asymmetry. The current note complements this evidence, reporting robust significant correlations between the absolute, but not the signed, realized returns on S&P500 stocks and estimates of the stocks’ contemporaneous volatility. The correlations consistently show at the cross-section and across time in analysis of daily, monthly, quarterly, half-yearly and yearly returns.