The leverage effect puzzle
Subtitle: disentangling sources of bias at high frequency
By: Yacine Ait-Sahalia, Jianqing Fan, Yingying Li
Contributors: Fan,  Jianqing; Li, Yingying; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17592; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17592.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "The leverage effect refers to the generally negative correlation between an asset return and its changes of volatility.  A natural estimate consists in using the empirical correlation between the daily returns and the changes of daily volatility estimated from high-frequency data.  The puzzle lies in the fact that such an intuitively natural estimate yields nearly zero correlation for most assets tested, despite the many economic reasons for expecting the estimated correlation to be negative.  To better understand the sources of the puzzle, we analyze the different asymptotic biases that are involved in high frequency estimation of the leverage effect, including biases due to discretization errors, to smoothing errors in estimating spot volatilities, to estimation error, and to market microstructure noise.  This decomposition enables us to propose novel bias correction methods for estimating the leverage effect"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 1/17/2012.

Includes bibliographical references.

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