A dynamic leverage stochastic volatility model

Hoang Nguyen, Trong-Nghia Nguyen and Minh-Ngoc Tran

Applied Economics Letters, 2023, vol. 30, issue 1, 97-102

Abstract: Stock returns are considered as a convolution of two random processes that are the return innovation and volatility innovation. The correlation of these two processes tends to be negative, which is the so-called leverage effect. In this study, we propose a dynamic leverage stochastic volatility (DLSV) model where the correlation structure between the return innovation and the volatility innovation is assumed to follow a generalized autoregressive score (GAS) process. We find that the leverage effect is reinforced in the market downturn period and weakened in the market upturn period.

Date: 2023
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DOI: 10.1080/13504851.2021.1983127

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