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Time-varying leverage effects

  • Bandi, Federico M.
  • Renò, Roberto

Vast empirical evidence points to the existence of a negative correlation, named ”leverage effect”, between shocks to variance and shocks to returns. We provide a nonparametric theory of leverage estimation in the context of a continuous-time stochastic volatility model with jumps in returns, jumps in variance, or both. Leverage is defined as a flexible function of the state of the firm, as summarized by the spot variance level. We show that its point-wise functional estimates have asymptotic properties (in terms of rates of convergence, limiting biases, and limiting variances) which crucially depend on the likelihood of the individual jumps and co-jumps as well as on the features of the jump size distributions. Empirically, we find economically important time-variation in leverage with more negative values associated with higher variance levels.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 169 (2012)
Issue (Month): 1 ()
Pages: 94-113

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Handle: RePEc:eee:econom:v:169:y:2012:i:1:p:94-113
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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