Empirical Evidence of the Leverage Effect in a Stochastic Volatility Model: A Realized Volatility Approach

Dinghai Xu and Yuying Li
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Yuying Li: School of Computer Science, University of Waterloo

No 1002, Working Papers from University of Waterloo, Department of Economics

Abstract: Increasing attention has been focused on the analysis of the realized volatility, which can be treated as a proxy for the true volatility. In this paper, we study the potential use of the realized volatility as a proxy in a stochastic volatility model estimation. We estimate the leveraged stochastic volatility model using the realized volatility computed from five popular methods across six sampling-frequency transaction data (from 1-min to 60-min). Availability of the realized volatility allows us to estimate the model parameters via the MLE and thus avoids computational challenge in the high dimensional integration.Six stock indices are considered in the empirical investigation. We discover some consistent findings and interesting patterns from the empirical results. In general, the significant leverage effect is consistently detected at each sampling frequency. The volatility persistence becomes weaker at the lower sampling frequency. We also find that the consistent-scaling and "optimal"-weighted realized volatility method proposed by Hansen and Lunde (2005) provide relatively better performances compared to other methods considered.

JEL-codes: C01 C51 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2010-05, Revised 2010-05
New Economics Papers: this item is included in nep-ets and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:wat:wpaper:1002

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