  This paper discusses a novel explanation for asymmetric volatility based on
the anchoring behavioral pattern. Anchoring as a heuristic bias causes
investors focusing on recent price changes and price levels, which two lead to
a belief in continuing trend and mean-reversion respectively. The empirical
results support our theoretical explanation through an analysis of large price
fluctuations in the S&P 500 and the resulting effects on implied and realized
volatility. These results indicate that asymmetry (a negative relationship)
between shocks and volatility in the subsequent period indeed exists. Moreover,
contrary to previous research, our empirical tests also suggest that implied
volatility is not simply an upward biased predictor of future deviation
compensating for the variance of the volatility but rather, due to investors
systematic anchoring to losses and gains in their volatility forecasts, it is a
co-integrated yet asymmetric over/under estimated financial instrument. We also
provide results indicating that the medium-term implied volatility (measured by
the VIX Index) is an unbiased though inefficient estimation of realized
volatility, while in contrast, the short-term volatility (measured by the
recently introduced VXST Index representing the 9-day implied volatility) is
also unbiased and yet efficient.
