Testing for leverage effects in the returns of US equities

Christophe Chorro (christophe.chorro@gmail.com), Dominique Guegan (dominique.guegan@univ-paris1.fr), Florian Ielpo (florianielpo@hotmail.com) and Hanjarivo Lalaharison (lalaharisonh@gmail.com)
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Christophe Chorro: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Dominique Guegan: UP1 - Université Paris 1 Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Labex ReFi - UP1 - Université Paris 1 Panthéon-Sorbonne, University of Ca’ Foscari [Venice, Italy]
Florian Ielpo: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Hanjarivo Lalaharison: Faculté des Sciences - Université d'Antananarivo - Université d'Antananarivo

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Abstract: This article questions the empirical usefulness of leverage effects to forecast the dynamics of equity returns. In sample, we consistently find a significant but limited contribution of leverage effects over the past 25 years of S&P 500 returns. From an out-of-sample forecasting perspective and using a variety of different models, we find no statistical or economical value in using leverage effects, provided that an asymmetric and fat-tailed conditional distribution is used. This conclusion holds both at the index level and for 70% of the individual stocks constituents of the equity index.

Keywords: S&P 500; Leverage effect; Generalized hyperbolic distributions; Mixture of Gaussian distributions; GARCH; Asymmetry (search for similar items in EconPapers)
Date: 2018-09
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Citations: View citations in EconPapers (4)

Published in Journal of Empirical Finance, 2018, 48, pp.290-306. ⟨10.1016/j.jempfin.2018.07.008⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01917590

DOI: 10.1016/j.jempfin.2018.07.008

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