Abstract

http://ssrn.com/abstract=2360256
 


 



Nonparametric Estimation of the Leverage Effect Using Information from Derivatives Markets


Ilze Kalnina


University of Montreal

Dacheng Xiu


University of Chicago - Booth School of Business

April 10, 2015

Chicago Booth Research Paper No. 13-83

Abstract:     
We consider a new nonparametric estimator of the leverage effect, which uses the stock price as well as a certain volatility instrument, such as the CBOE volatility index (VIX) or the Black-Scholes implied volatility. The theoretical justification for this estimator relies on the relationship between the volatility instrument and the spot volatility, together with a certain invariance property of the spot correlation. In addition, we propose a nonparametric estimator that uses stock prices alone. The instrument-based estimator has a faster rate of convergence, whereas the price-only estimator is valid under weaker assumptions. Finally, we provide a time series of monthly leverage effect estimates of the S&P 500 index from 2003 to 2013 using the VIX as a volatility instrument. We find that the credit risk, illiquidity, and the debt-to-equity ratio are important factors related to the dynamics of the leverage effect.

Number of Pages in PDF File: 59

Keywords: semimartingale, spot correlation, VIX, implied volatility, high frequency data

JEL Classification: G12, C22, C14


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Date posted: November 26, 2013 ; Last revised: April 15, 2015

Suggested Citation

Kalnina, Ilze and Xiu, Dacheng, Nonparametric Estimation of the Leverage Effect Using Information from Derivatives Markets (April 10, 2015). Chicago Booth Research Paper No. 13-83. Available at SSRN: http://ssrn.com/abstract=2360256 or http://dx.doi.org/10.2139/ssrn.2360256

Contact Information

Ilze Kalnina
University of Montreal ( email )
C.P. 6128 succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada
Dacheng Xiu (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
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