A nonparametric test of the leverage hypothesis
The so-called leverage hypothesis is that negative shocks to prices/returns aff ect volatility more than equal positive shocks. Whether this is attributable to changing financial leverage is still subject to dispute but the terminology is in wide use. There are many tests of the leverage hypothesis using discrete time data. These typically involve fitting of a general parametric or semiparametric model to conditional volatility and then testing the implied restrictions on parameters or curves. We propose an alternative way of testing this hypothesis using realised volatility as an alternative direct nonparametric measure. Our null hypothesis is of conditional distributional dominance and so is much stronger than the usual hypotheses considered previously. We implement our test on a number of stock return datasets using intraday data over a long span. We find powerful evidence in favour of our hypothesis.
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- Oliver Linton & Kyungchul Song & Yoon-Jae Whang, 2009.
"An improved bootstrap test of stochastic dominance,"
Economics Working Papers
we094827, Universidad Carlos III, Departamento de Economía.
- Linton, Oliver & Song, Kyungchul & Whang, Yoon-Jae, 2010. "An improved bootstrap test of stochastic dominance," Journal of Econometrics, Elsevier, vol. 154(2), pages 186-202, February.
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- Ole E. Barndorff-Nielsen & Neil Shephard, 2003.
"Econometrics of testing for jumps in financial economics using bipower variation,"
2003-W21, Economics Group, Nuffield College, University of Oxford.
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- Ole E. Barndorff-Nielsen & Neil Shephard, 2004. "Econometrics of testing for jumps in financial economics using bipower variationÂ ," OFRC Working Papers Series 2004fe01, Oxford Financial Research Centre.
- Neil Shephard & Ole Barndorff-Nielsen, 2003. "Econometrics of testing for jumps in financial economics using bipower variation," Economics Series Working Papers 2004-FE-01, University of Oxford, Department of Economics.
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