Does the Financial Leverage Effect Depend on Volatility Regimes?

Sora Chon () and Jaeho Kim

Finance Research Letters, 2021, vol. 39, issue C

Abstract: This paper investigates how the financial leverage effect changes across different volatility regimes. To test for regime dependency in the leverage effect, we introduce a new regime switching stochastic volatility model and apply the model to daily Standard and Poor’s 500 and NASDAQ return data. Our empirical analysis that uses Bayesian inference reveals that the leverage effect is reinforced when financial markets enter into high or medium-high volatility regimes.

Keywords: Regime switching; Stochastic volatility; Leverage effect (search for similar items in EconPapers)
JEL-codes: C11 G10 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:39:y:2021:i:c:s1544612320301872

DOI: 10.1016/j.frl.2020.101600

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