Estimation of the Continuous and Discontinuous Leverage Effects

67 Pages Posted: 19 Nov 2014 Last revised: 2 Oct 2015

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jianqing Fan

Princeton University - Bendheim Center for Finance

Roger J. A. Laeven

University of Amsterdam - Department of Quantitative Economics (KE)

Christina Dan Wang

Columbia University - Department of Statistics

Xiye Yang

Rutgers, The State University of New Jersey - Department of Economics

Date Written: September 30, 2015

Abstract

This paper examines the leverage effect, or the generally negative covariation between asset returns and their changes in volatility, under a general setup that allows the log-price and volatility processes to be Ito semimartingales. We decompose the leverage effect into continuous and discontinuous parts and develop statistical methods to estimate them. We establish the asymptotic properties of these estimators. We also extend our methods and results to the situation where there is market microstructure noise in the observed returns. We show in Monte Carlo simulations that our estimators have good finite sample performance. When applying our methods to real data, our empirical results provide convincing evidence of the presence of the two leverage effects, especially the discontinuous one.

Suggested Citation

Ait-Sahalia, Yacine and Fan, Jianqing and Laeven, Roger Jean Auguste and Wang, Christina Dan and Yang, Xiye, Estimation of the Continuous and Discontinuous Leverage Effects (September 30, 2015). Available at SSRN: https://ssrn.com/abstract=2523677 or http://dx.doi.org/10.2139/ssrn.2523677

Yacine Ait-Sahalia

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jianqing Fan

Princeton University - Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States
609-258-7924 (Phone)
609-258-8551 (Fax)

HOME PAGE: http://orfe.princeton.edu/~jqfan/

Roger Jean Auguste Laeven

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Valckenierstraat 65-67
Amsterdam, 1018 XE
Netherlands
+31 20 525 4252 (Phone)

HOME PAGE: http://www.rogerlaeven.com

Christina Dan Wang (Contact Author)

Columbia University - Department of Statistics ( email )

Mail Code 4403
New York, NY 10027
United States

HOME PAGE: http://stat.columbia.edu/~dwang/

Xiye Yang

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://economics.rutgers.edu/people/474-xiye-yang

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