Testing for Leverage Effects in the Returns of US Equities
CES Working Papers No. 2014.22
16 Pages Posted: 7 Apr 2015 Last revised: 12 Jan 2017
Date Written: December 22, 2016
This article questions the empirical usefulness of leverage effects to describe the dynamics of equity returns. Relying on both in and out of sample tests we consistently find a weak contribution of leverage effects over the past 25 years of S&P 500 returns. The skewness in the conditional distribution of the return’s time series model is found to explain most of the returns’ distribution’s asymmetry. This conclusion holds both at the index level and for 70% of the individual stocks constituents of the equity index.
Keywords: Asymmetry, GARCH, Mixture of Gaussian distributions, Generalized hyperbolic distributions, S&P 500, Leverage effect
JEL Classification: C12, C22, G17
Suggested Citation: Suggested Citation