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On return-volatility correlation in financial dynamics

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  • J. Shen
  • B. Zheng
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    Abstract

    With the daily and minutely data of the German DAX and Chinese indices, we investigate how the return-volatility correlation originates in financial dynamics. Based on a retarded volatility model, we may eliminate or generate the return-volatility correlation of the time series, while other characteristics, such as the probability distribution of returns and long-range time-correlation of volatilities etc., remain essentially unchanged. This suggests that the leverage effect or anti-leverage effect in financial markets arises from a kind of feedback return-volatility interactions, rather than the long-range time-correlation of volatilities and asymmetric probability distribution of returns. Further, we show that large volatilities dominate the return-volatility correlation in financial dynamics.

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    File URL: http://arxiv.org/pdf/1202.0342
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    Paper provided by arXiv.org in its series Papers with number 1202.0342.

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    Date of creation: Feb 2012
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    Publication status: Published in published in EPL (Europhysics Letters), Volume 88, Issue 2, pp. 28003 (2009)
    Handle: RePEc:arx:papers:1202.0342

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    Web page: http://arxiv.org/

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