The Leverage Effect in Financial Markets: Retarded Volatility And Market Panic

12 Pages Posted: 4 Feb 2001

See all articles by Jean-Philippe Bouchaud

Jean-Philippe Bouchaud

Capital Fund Management

Andrew Matacz

Capital Fund Management

Marc Potters

Capital Fund Management; Capital Fund Management

Date Written: January 9, 2001

Abstract

We investigate quantitatively the so-called leverage effect, which corresponds to a negative correlation between past returns and future volatility. For individual stocks, this correlation is moderate and decays exponentially over 50 days, while for stock indices, it is much stronger but decays faster. For individual stocks, the magnitude of this correlation has a universal value that can be rationalized in terms of a new 'retarded' model which interpolates between a purely additive and a purely multiplicative stochastic process. For stock indices a specific market panic phenomenon seems to be necessary to account for the observed amplitude of the effect.

JEL Classification: G12

Suggested Citation

Bouchaud, Jean-Philippe and Matacz, Andrew and Potters, Marc and Potters, Marc, The Leverage Effect in Financial Markets: Retarded Volatility And Market Panic (January 9, 2001). Available at SSRN: https://ssrn.com/abstract=255868 or http://dx.doi.org/10.2139/ssrn.255868

Jean-Philippe Bouchaud

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

Andrew Matacz

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 41 27 91 08 (Phone)
+33 1 47 39 04 47 (Fax)

Marc Potters (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France