On return-volatility correlation in financial dynamics

J. Shen and B. Zheng

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Abstract: With the daily and minutely data of the German DAX and Chinese indices, we investigate how the return-volatility correlation originates in financial dynamics. Based on a retarded volatility model, we may eliminate or generate the return-volatility correlation of the time series, while other characteristics, such as the probability distribution of returns and long-range time-correlation of volatilities etc., remain essentially unchanged. This suggests that the leverage effect or anti-leverage effect in financial markets arises from a kind of feedback return-volatility interactions, rather than the long-range time-correlation of volatilities and asymmetric probability distribution of returns. Further, we show that large volatilities dominate the return-volatility correlation in financial dynamics.

Date: 2012-02
New Economics Papers: this item is included in nep-cwa, nep-ets, nep-fdg, nep-fmk, nep-mac, nep-mst, nep-rmg and nep-tra
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Published in published in EPL (Europhysics Letters), Volume 88, Issue 2, pp. 28003 (2009)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1202.0342

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