Model-Free Leverage Effect Estimators at High Frequency

Ilze Kalnina

University of Montreal

Dacheng Xiu

University of Chicago - Booth School of Business

November 1, 2013

Chicago Booth Research Paper No. 13-83

We consider a new nonparametric estimator of the leverage effect, which uses the data on stock prices as well as a certain volatility instrument, such as the CBOE volatility index (VIX) or Black-Scholes implied volatility. The theoretical justification for the new estimator exploits the relationship between the volatility instrument and the spot volatility, together with a certain invariance property of the spot correlation. We derive the asymptotic distribution of the estimator and find that it has good numerical properties in finite samples. We compare this instrument-based estimator with the nonparametric price-only leverage estimator. We demonstrate empirically and in simulations that the price-only estimator is substantially less precise than the instrument-based estimator. Finally, we use the new estimator to provide time series of monthly leverage effects of the S&P 500 index from 2003 to 2012 using two different volatility instruments. We also find that the credit risk, liquidity, and the debt-to-equity are important determinants of the leverage effect.

Number of Pages in PDF File: 30

Keywords: semimartingale, spot correlation, VIX, implied volatility

JEL Classification: G12, C22, C14

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Date posted: November 26, 2013  

Suggested Citation

Kalnina, Ilze and Xiu, Dacheng, Model-Free Leverage Effect Estimators at High Frequency (November 1, 2013). 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
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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