Testing for Leverage Effect in Financial Returns
Christophe Chorro (),
Florian Ielpo () and
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Christophe Chorro: Centre d'Economie de la Sorbonne, https://christophe.chorro.fr/
Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne
This article questions the empirical usefulness of leverage effects to describe the dynamics of equity returns. Using a recursive estimation scheme that accurately disentangles the asymmetry coming from the conditional distribution of returns and the asymmetry that is related to the past return to volatility component in GARCH models, we test for the statistical significance of the latter. Relying on both in and out of sample tests we consistently find a weak contribution of leverage effect over the past 25 years of S&P 500 returns, casting light on the importance of the conditional distribution in time series models
Keywords: Maximum likelihood method; related-GARCH process; recursive estimation method; mixture of Gaussian distributions; generalized hyperbolic distributions; S&P 500; forecast; leverage effect (search for similar items in EconPapers)
JEL-codes: C13 C58 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:14022
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