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Modeling the leverage effect with copulas and realized volatility

Cathy Ning (), Dinghai Xu and Tony Wirjanto ()

Finance Research Letters, 2008, vol. 5, issue 4, 221-227

Abstract: In this paper, we propose the use of static and dynamic copulas to study the leverage effect in the S&P 500 index. Copula models can conveniently separate the leverage effect from the marginal distributions of the return and its volatility. Daily volatility is proxied by a measure of realized volatility, which is constructed from high-frequency data. We uncover a significant leverage effect in the S&P 500 index, and this leverage effect is found to be changing over time in a highly persistent manner. Moreover the dynamic copula models are shown to outperform the static counterparts.

Keywords: Leverage; effect; Copulas; Tail; dependence; Realized; volatility; High; frequency; data (search for similar items in EconPapers)
Date: 2008
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