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Time-Varying Leverage Effects

37 Pages Posted: 2 Jun 2010  

Federico M. Bandi

Johns Hopkins University - Carey Business School

Roberto Renò

University of Verona - Department of Economics

Date Written: May 26, 2010

Abstract

Vast empirical evidence points to the existence of a negative correlation, named “leverage effect”, between shocks in variance and shocks in returns. We provide a nonparametric theory of leverage estimation in the context of a continuous-time stochastic volatility model with jumps in returns, jumps in variance, or both. Leverage is defined as a flexible function of the state of the firm, as summarized by the spot variance level. We show that its point-wise functional estimates have asymptotic properties (in terms of rates of convergence, limiting biases, and limiting variances) which crucially depend on the likelihood of the individual jumps and co-jumps as well as on the features of the jump size distributions. Empirically, we find economically important time-variation in leverage with more negative values associated with higher variance levels.

Suggested Citation

Bandi, Federico M. and Renò, Roberto, Time-Varying Leverage Effects (May 26, 2010). Available at SSRN: https://ssrn.com/abstract=1619563 or http://dx.doi.org/10.2139/ssrn.1619563

Federico Bandi

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Roberto Renò (Contact Author)

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

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