The leverage effect in financial markets: retarded volatility and market panic

2001/01/16 by Jean-Philippe Bouchaud, Andrew Matacz, Marc Potters · 2 citations
Physics and Astronomy · #cond-mat

paper · pdf · doi:10.1103/physrevlett.87.228701

published as Physical Review Letters 87(22), 228701 (2001) · Corrected word inversion in abstract (should read: past returns and future volatility). LaTeX, 12 pp, 2 figures

arxiv created 2001/01/16 · arxiv updated 2009/11/30

Abstract

We investigate quantitatively the so-called leverage effect, which corresponds to a negative correlation between past returns and future volatility. For individual stocks, this correlation is moderate and decays exponentially over 50 days, while for stock indices, it is much stronger but decays faster. For individual stocks, the magnitude of this correlation has a universal value that can be rationalized in terms of a new `retarded' model which interpolates between a purely additive and a purely multiplicative stochastic process. For stock indices a specific market panic phenomenon seems to be necessary to account for the observed amplitude of the effect.

Cited by

• A diffusion-based generative model for financial time series via geometric Brownian motion
• Beyond Visual Realism: Toward Reliable Financial Time Series Generation

Related

• A threshold model for local volatility: evidence of leverage and mean reversion effects on historical data
• Estimation of the discontinuous leverage effect: Evidence from the NASDAQ order book
• Volatility Forecasts Using Nonlinear Leverage Effects
• Gain/loss asymmetry in time series of individual stock prices and its relationship to the leverage effect
• Density Forecasts and the Leverage Effect: Some Evidence from Observation and Parameter-Driven Volatility Models