Density forecasts and the leverage effect: Evidence from Observation and parameter-Driven volatility models

Leopoldo Catania and Nima Nonejad

The European Journal of Finance, 2020, vol. 26, issue 2-3, 100-118

Abstract: The leverage effect refers to the well-known relationship between returns and volatility for an equity. When returns fall, volatility increases. We evaluate the role of the leverage effect with regards to generating density forecasts of equity returns using well-known observation and parameter-driven conditional volatility models. These models differ in their assumptions regarding: The parametric specification, the evolution of the conditional volatility process and how the leverage effect is specified. The ability of a model to generate accurate density forecasts when the leverage effect is incorporated or not as well as a comparison between different model-types is analyzed using a large number of financial time series. For each model type, the specification with the leverage effect tends to generate more accurate density forecasts than its no-leverage counterpart. Among the specifications considered, the Beta-t-EGARCH model is the top performer, regardless of whether we attach the same weight to each region of the conditional distribution or emphasize the left tail.

Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/1351847X.2019.1586744 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:100-118

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REJF20

DOI: 10.1080/1351847X.2019.1586744

Access Statistics for this article

The European Journal of Finance is currently edited by Chris Adcock

More articles in The European Journal of Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().