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More stylized facts of financial markets: leverage effect and downside correlations


  • Bouchaud, Jean-Philippe
  • Potters, Marc


We discuss two more universal features of stock markets: the so-called leverage effect (a negative correlation between past returns and future volatility), and the increased downside correlations. For individual stocks, the leverage correlation 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. As for the increase of correlations in highly volatile periods, we investigate how much of this effect can be explained within a simple non-Gaussian one-factor description with time independent correlations. In particular, this one-factor model can explain the level and asymmetry of empirical exceedance correlations, which reflects the fat-tailed and negatively skewed distribution of market returns.

Suggested Citation

  • Bouchaud, Jean-Philippe & Potters, Marc, 2001. "More stylized facts of financial markets: leverage effect and downside correlations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 60-70.
  • Handle: RePEc:eee:phsmap:v:299:y:2001:i:1:p:60-70 DOI: 10.1016/S0378-4371(01)00282-5

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    References listed on IDEAS

    1. Andrew Ang & Geert Bekaert, 1999. "International Asset Allocation with Time-Varying Correlations," NBER Working Papers 7056, National Bureau of Economic Research, Inc.
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    Cited by:

    1. repec:eee:phsmap:v:486:y:2017:i:c:p:618-627 is not listed on IDEAS
    2. Roberto Mota Navarro & Hern'an Larralde Ridaura, 2016. "A detailed heterogeneous agent model for a single asset financial market with trading via an order book," Papers 1601.00229,, revised Jul 2016.
    3. Kristoufek, Ladislav, 2014. "Leverage effect in energy futures," Energy Economics, Elsevier, vol. 45(C), pages 1-9.
    4. Jun-jie Chen & Bo Zheng & Lei Tan, 2014. "Agent-based model with asymmetric trading and herding for complex financial systems," Papers 1407.5258,
    5. Wei-Xing Zhou, 2007. "Universal price impact functions of individual trades in an order-driven market," Papers 0708.3198,, revised Apr 2008.
    6. 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.
    7. Gao, Yan & Gao, Yao, 2015. "Statistical properties of short-selling and margin-trading activities and their impacts on returns in the Chinese stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 438(C), pages 293-307.
    8. Goswami, B. & Ambika, G. & Marwan, N. & Kurths, J., 2012. "On interrelations of recurrences and connectivity trends between stock indices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(18), pages 4364-4376.
    9. 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).
    10. Zoltan Eisler & Janos Kertesz, 2004. "Multifractal model of asset returns with leverage effect," Papers cond-mat/0403767,, revised May 2004.
    11. 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.


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