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'Leverage Effect' in country betas and volatilities?

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  • Alina Synyavska
  • Numan Ülkü

Abstract

Leverage effect hypothesis predicts past returns to have a negative effect on equity riskiness. We document a surprising pattern: the effect of past returns on country index betas and volatilities turns into positive as past-return horizon is extended. Past 60-month returns have a significant positive effect, which provides a direct means of ruling out leverage hypothesis as an explanation of asymmetric volatility. The positive effect of distant-past returns is puzzling. It appears to be due to mean reversion in stock indexes and international investors' trading patterns consistent with mean reversion.

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  • Alina Synyavska & Numan Ülkü, 2015. "'Leverage Effect' in country betas and volatilities?," Applied Economics Letters, Taylor & Francis Journals, vol. 22(11), pages 848-853, July.
    • Handle: RePEc:taf:apeclt:v:22:y:2015:i:11:p:848-853
    DOI: 10.1080/13504851.2014.982849
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    References listed on IDEAS

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