Modeling the Leverage Effect with Copulas and Realized Volatility

Ning, Cathy; Xu, Dinghai; Wirjanto, Tony S.

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Modeling the Leverage Effect with Copulas and Realized Volatility

Finance Research Letters 5 (2008) 221-227

7 Pages Posted: 31 Mar 2013 Last revised: 26 Jan 2015

See all articles by Cathy Ning

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Date Written: 2008

Abstract

In this paper, we propose the use of static and dynamic copulas to study the leverage effect in the S&P 500 index. Copula models can conveniently separate the leverage effect from the marginal distributions of the return and its volatility. Daily volatility is proxied by a measure of realized volatility, which is constructed from high-frequency data. We uncover a significant leverage effect in the S&P 500 index, and this leverage effect is found to be changing over time in a highly persistent manner. Moreover the dynamic copula models are shown to outperform the static counterparts.

Keywords: Leverage effect, Copulas, Tail dependence, Realized volatility, High frequency data

JEL Classification: C14, C51, G10, G32

Suggested Citation: Suggested Citation

Ning, Cathy and Xu, Dinghai and Wirjanto, Tony S., Modeling the Leverage Effect with Copulas and Realized Volatility (2008). Finance Research Letters 5 (2008) 221-227, Available at SSRN: https://ssrn.com/abstract=2241809