Estimation of the Continuous and Discontinuous Leverage Effect

• Activity Number: 49
• Type: Invited
• Date/Time: Sunday, August 9, 2015 : 4:00 PM to 5:50 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Christina Dan Wang*
• Companies: Princeton University
• Keywords: Leverage Effect ; Semimartingale ; volatility

Abstract

This paper examines the leverage effect, or the generally negative covariation between asset returns and their changes in volatility, under a general setup that allows the log-price and volatility processes to be Ito semimartingales. We decompose the leverage effect into continuous and discontinuous parts and develop statistical methods to estimate them. We establish the asymptotic properties of these estimators. We also extend our methods and results to the situation where there is market microstructure noise in the observed returns. We show in Monte Carlo simulations that our estimators have good finite sample performance. When applying our methods to real data, our empirical results provide convincing evidence of the presence of the two leverage effects, especially the discontinuous one.