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Testing for leverage effects in the returns of US equities

Author

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  • Chorro, Christophe
  • Guégan, Dominique
  • Ielpo, Florian
  • Lalaharison, Hanjarivo

Abstract

This article questions the empirical usefulness of leverage effects to forecast the dynamics of equity returns. In sample, we consistently find a significant but limited contribution of leverage effects over the past 25 years of S&P 500 returns. From an out-of-sample forecasting perspective and using a variety of different models, we find no statistical or economical value in using leverage effects, provided that an asymmetric and fat-tailed conditional distribution is used. This conclusion holds both at the index level and for 70% of the individual stocks constituents of the equity index.

Suggested Citation

  • Chorro, Christophe & Guégan, Dominique & Ielpo, Florian & Lalaharison, Hanjarivo, 2018. "Testing for leverage effects in the returns of US equities," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 290-306.
  • Handle: RePEc:eee:empfin:v:48:y:2018:i:c:p:290-306
    DOI: 10.1016/j.jempfin.2018.07.008
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    Cited by:

    1. Dangxing Chen, 2019. "Does the leverage effect affect the return distribution?," Papers 1909.08662, arXiv.org, revised Sep 2019.
    2. Chevallier, Julien & Ielpo, Florian, 2017. "Investigating the leverage effect in commodity markets with a recursive estimation approach," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 763-778.

    More about this item

    Keywords

    Asymmetry; GARCH; Mixture of Gaussian distributions; Generalized hyperbolic distributions; S&P 500; Leverage effect;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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