Nonparametric estimation of the leverage effect: a trade-off between robustness and efficiency

Ilze Kalnina and Dacheng Xiu

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: We consider two new approaches to nonparametric estimation of the leverage effect. The first approach uses stock prices alone. The second approach uses the data on stock prices as well as a certain volatility instrument, such as the CBOE volatility index (VIX) or the Black-Scholes implied volatility. The theoretical justification for the instrument-based estimator relies on a certain invariance property, which can be exploited when high frequency data is available. The price-only estimator is more robust since it is valid under weaker assumptions. However, in the presence of a valid volatility instrument, the price-only estimator is inefficient as the instrument-based estimator has a faster rate of convergence. We consider two empirical applications, in which we study the relationship between the leverage effect and the debt-to-equity ratio, credit risk, and illiquidity.

Keywords: Derivatives; VIX; Implied volatility; High frequency data; Spot correlation (search for similar items in EconPapers)
JEL-codes: C14 C22 G12 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2015
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (1)

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http://hdl.handle.net/1866/12853 (application/pdf)

Related works:
Journal Article: Nonparametric Estimation of the Leverage Effect: A Trade-Off Between Robustness and Efficiency (2017)
Working Paper: Nonparametric Estimation of the Leverage Effect: A Trade-off between Robustness and Efficiency (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:2015-05

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