A Study About the Existence of the Leverage Effect in Stochastic Volatility Models

Physica A, 388(4), Feb. 2009, 419-432

25 Pages Posted: 26 May 2012 Last revised: 23 Mar 2018

See all articles by Ionut Florescu

Ionut Florescu

Stevens Institute of Technology

Cristian Pasarica

Barclays Investment Bank

Date Written: November 3, 2008

Abstract

The empirical relationship between the return of an asset and the volatility of the asset has been well documented in the financial literature. Named the leverage e ffect or sometimes risk-premium effect, it is observed in real data that, when the return of the asset decreases, the volatility increases and vice-versa.

Consequently, it is important to demonstrate that any formulated model for the asset price is capable to generate this eff ect observed in practice. Furthermore, we need to understand the conditions on the parameters present in the model that guarantee the apparition of the leverage effect.

In this paper we analyze two general speci cations of stochastic volatility models and their capability of generating the perceived leverage effect. We derive conditions for the apparition of leverage e ffect in both of these stochastic volatility models. We exemplify using stochastic volatility models used in practice and we explicitly state the conditions for the existence of the leverage effect in these examples.

Suggested Citation

Florescu, Ionut and Pasarica, Cristian, A Study About the Existence of the Leverage Effect in Stochastic Volatility Models (November 3, 2008). Physica A, 388(4), Feb. 2009, 419-432. Available at SSRN: https://ssrn.com/abstract=2066879

Ionut Florescu (Contact Author)

Stevens Institute of Technology ( email )

Castle Point on the Hudson
Hoboken, NJ 07030
United States

Cristian Pasarica

Barclays Investment Bank ( email )

5 The North Colonnade
London, Canary Wharf E14 4BB
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
58
Abstract Views
471
rank
362,417
PlumX Metrics