'Leverage Effect' in country betas and volatilities?
Alina Synyavska and
Applied Economics Letters, 2015, vol. 22, issue 11, 848-853
Leverage effect hypothesis predicts past returns to have a negative effect on equity riskiness. We document a surprising pattern: the effect of past returns on country index betas and volatilities turns into positive as past-return horizon is extended. Past 60-month returns have a significant positive effect, which provides a direct means of ruling out leverage hypothesis as an explanation of asymmetric volatility. The positive effect of distant-past returns is puzzling. It appears to be due to mean reversion in stock indexes and international investors' trading patterns consistent with mean reversion.
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