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The leverage effect in financial markets: retarded volatility and market panic

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  • Jean-Philippe Bouchaud

    (Science & Finance, Capital Fund Management
    CEA Saclay;)

  • Andrew Matacz

    (Science & Finance, Capital Fund Management)

  • Marc Potters

    (Science & Finance, Capital Fund Management)

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.

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Bibliographic Info

Paper provided by Science & Finance, Capital Fund Management in its series Science & Finance (CFM) working paper archive with number 0101120.

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Date of creation: Jan 2001
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Publication status: Published in Physical Review Letters 87(22), 228701 (2001)
Handle: RePEc:sfi:sfiwpa:0101120

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Cited by:
  1. Marc Potters & Jean-Philippe Bouchaud, 2001. "More stylized facts of financial markets: leverage effect and downside correlations," Science & Finance (CFM) working paper archive 29960, Science & Finance, Capital Fund Management.
  2. Gu, Gao-Feng & Zhou, Wei-Xing, 2007. "Statistical properties of daily ensemble variables in the Chinese stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 383(2), pages 497-506.
  3. Florescu, Ionuţ & Pãsãricã, Cristian Gabriel, 2009. "A study about the existence of the leverage effect in stochastic volatility models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(4), pages 419-432.
  4. Hatemi-J, Abdulnasser & Irandoust, Manuchehr, 2011. "The dynamic interaction between volatility and returns in the US stock market using leveraged bootstrap simulations," Research in International Business and Finance, Elsevier, vol. 25(3), pages 329-334, September.
  5. Vicente Medina Martínez & Ángel Pardo Tornero, 2012. "Stylized facts of CO2 returns," Working Papers. Serie AD 2012-14, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  6. Lisa Borland & Jean-Philippe Bouchaud & Jean-Francois Muzy & Gilles Zumbach, 2005. "The Dynamics of Financial Markets -- Mandelbrot's multifractal cascades, and beyond," Science & Finance (CFM) working paper archive 500061, Science & Finance, Capital Fund Management.
  7. Pierre Cizeau & Marc Potters & Jean-Philippe Bouchaud, 2000. "Correlation structure of extreme stock returns," Papers cond-mat/0006034, arXiv.org, revised Jan 2001.
  8. Guido Russi, 2012. "Estimating the Leverage Effect Using High Frequency Data," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 1-24, February.
  9. Ladislav Kristoufek, 2014. "Leverage effect in energy futures," Papers 1403.0064, arXiv.org.
  10. Lisa Borland & Yoan Hassid, 2010. "Market panic on different time-scales," Papers 1010.4917, arXiv.org.
  11. Jean-Philippe Bouchaud, 2002. "An introduction to statistical finance," Science & Finance (CFM) working paper archive 313238, Science & Finance, Capital Fund Management.

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