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
Date Written: 2008
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