Equilibrium-based volatility models of the market portfolio rate of return (peacock tails or stotting gazelles)

David Feldman, Xin Xu

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


We introduce a theoretical and empirical method of studying equilibrium-consistent volatility models. We implement it with the market portfolio’s return, which is central to financial risk management. Within an equilibrium framework, we study two families of such models. One is deterministic volatility, represented by current popular models. The other is in the “constant elasticity of variance” family, in which we propose new models. Theoretically, we show that, together with constant expected returns, the latter family tends to have better ability to forecast. Empirically, our proposed models, while as easy to implement as the popular ones, outperform them in three out-of-sample forecast evaluations of different time periods, by standard predictability criteria. This is true particularly during high-volatility periods, whether the market rises or falls.

Original languageEnglish
Pages (from-to)493-518
Number of pages26
JournalAnnals of Operations Research
Issue number2
StatePublished - 1 Mar 2018
Externally publishedYes


  • Constant elasticity of variance
  • Equilibrium
  • Market portfolio
  • Market risk
  • Piecewise constant volatility
  • Predictive power
  • RiskMetrics
  • Systematic risk
  • Volatility model

ASJC Scopus subject areas

  • General Decision Sciences
  • Management Science and Operations Research


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