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Testing for Leverage Effect in Financial Returns

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Abstract

This article questions the empirical usefulness of leverage effects to describe the dynamics of equity returns. Using a recursive estimation scheme that accurately disentangles the asymmetry coming from the conditional distribution of returns and the asymmetry that is related to the past return to volatility component in GARCH models, we test for the statistical significance of the latter. Relying on both in and out of sample tests we consistently find a weak contribution of leverage effect over the past 25 years of S&P 500 returns, casting light on the importance of the conditional distribution in time series models

Suggested Citation

  • Christophe Chorro & Dominique Guegan & Florian Ielpo & Hanjarivo Lalaharison, 2014. "Testing for Leverage Effect in Financial Returns," Documents de travail du Centre d'Economie de la Sorbonne 14022, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:14022
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    1. Petrică Andreea-Cristina & Stancu Stelian, 2017. "The determinants of exchange rates and the movements of EUR/RON exchange rate via non-linear stochastic processes," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 11(1), pages 937-948, July.
    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.

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    More about this item

    Keywords

    Maximum likelihood method; related-GARCH process; recursive estimation method; mixture of Gaussian distributions; generalized hyperbolic distributions; S&P 500; forecast; leverage effect;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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