Measuring High-Frequency Causality Between Returns, Realized Volatility, and Implied Volatility

We provide evidence on two alternative mechanisms of interaction between returns and volatilities: the leverage ef fect and the volatility feedback effect. We stress the importance of distinguishing between realized volatility and implied volatility and find that implied volatilities are essential for assessing the volatility feedback effect. We also study the impact of news on returns and volatility. We introduce a concept of news based on the difference between implied and realized volatilities (the variance risk premium) and find that a positive variance risk premium has more impact on returns than a negative variance risk premium.