Abstract

http://ssrn.com/abstract=2360256
 


 



Nonparametric Estimation of the Leverage Effect: A Trade-off between Robustness and Efficiency


Ilze Kalnina


University of Montreal

Dacheng Xiu


University of Chicago - Booth School of Business

November 22, 2015

Chicago Booth Research Paper No. 13-83

Abstract:     
We consider two new approaches to nonparametric estimation of the leverage effect. The first approach uses stock prices alone. The second approach uses the data on stock prices as well as a certain volatility instrument, such as the CBOE volatility index (VIX) or the Black-Scholes implied volatility. The theoretical justification for the instrument-based estimator relies on a certain invariance property, which can be exploited when high frequency data is available. The price-only estimator is more robust since it is valid under weaker assumptions. However, in the presence of a valid volatility instrument, the price-only estimator is inefficient as the instrument-based estimator has a faster rate of convergence. We consider two empirical applications, in which we study the relationship between the leverage effect and the debt-to-equity ratio, credit risk, and illiquidity.

Number of Pages in PDF File: 62

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: November 24, 2015

Suggested Citation

Kalnina, Ilze and Xiu, Dacheng, Nonparametric Estimation of the Leverage Effect: A Trade-off between Robustness and Efficiency (November 22, 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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