A nonparametric test of the leverage hypothesis

Oliver Linton, Yoon-Jae Whang and Yu-Min Yen
Additional contact information
Yu-Min Yen: Institute for Fiscal Studies

No CWP24/12, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract: 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.

Keywords: Distribution Function; Leverage Effect; Gaussian Process (search for similar items in EconPapers)
JEL-codes: C14 C15 (search for similar items in EconPapers)
Date: 2012-09-13
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.cemmap.ac.uk/wps/cwp241212.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: A nonparametric test of the leverage hypothesis (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ifs:cemmap:24/12

Ordering information: This working paper can be ordered from
The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE

Access Statistics for this paper

More papers in CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE. Contact information at EDIRC.
Bibliographic data for series maintained by Emma Hyman ().