Modeling the leverage effect with copulas and realized volatility
In this paper, we propose the use of static and dynamic copulas to study the leverage effect in the S&P 500 index. Copula models can conveniently separate the leverage effect from the marginal distributions of the return and its volatility. Daily volatility is proxied by a measure of realized volatility, which is constructed from high-frequency data. We uncover a significant leverage effect in the S&P 500 index, and this leverage effect is found to be changing over time in a highly persistent manner. Moreover the dynamic copula models are shown to outperform the static counterparts.
Year of publication: |
2008
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Authors: | Ning, Cathy ; Xu, Dinghai ; Wirjanto, Tony S. |
Published in: |
Finance Research Letters. - Elsevier, ISSN 1544-6123. - Vol. 5.2008, 4, p. 221-227
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Publisher: |
Elsevier |
Keywords: | Leverage effect Copulas Tail dependence Realized volatility High frequency data |
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