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Testing for Leverage Effect in Financial Returns

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  • Christophe Chorro

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Dominique Guegan

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Florian Ielpo

    ()
    (Lombard Odier - Lombard Odier Darier Hentsch & Cie)

  • Hanjarivo Lalaharison

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

Abstract

This article questions the empirical usefulness of leverage effects to describe the dynamics of equity returns. Using a recursive estimation scheme that accurately disentangles the asymmetry coming from the conditional distribution of returns and the asymmetry that is related to the past return to volatility component in GARCH models, we test for the statistical significance of the latter. Relying on both in and out of sample tests we consistently find a weak contribution of leverage effect over the past 25 years of S&P 500 returns, casting light on the importance of the conditional distribution in time series models.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00973922.

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Date of creation: Feb 2014
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Handle: RePEc:hal:cesptp:halshs-00973922

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Keywords: Maximum likelihood method; related-GARCH process; recursive estimation method; mixture of Gaussian distributions; Generalized hyperbolic distributions; S&P 500; forecast; leverage effect;

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  34. repec:hal:journl:halshs-00437927 is not listed on IDEAS
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