A study about the existence of the leverage effect in stochastic volatility models

Ionuţ Florescu, Cristian Gabriel Pãsãricã

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

The empirical relationship between the return of an asset and the volatility of the asset has been well documented in the financial literature. Named the leverage effect or sometimes risk-premium effect, it is observed in real data that, when the return of the asset decreases, the volatility increases and vice versa. Consequently, it is important to demonstrate that any formulated model for the asset price is capable of generating this effect observed in practice. Furthermore, we need to understand the conditions on the parameters present in the model that guarantee the apparition of the leverage effect. In this paper we analyze two general specifications of stochastic volatility models and their capability of generating the perceived leverage effect. We derive conditions for the apparition of leverage effect in both of these stochastic volatility models. We exemplify using stochastic volatility models used in practice and we explicitly state the conditions for the existence of the leverage effect in these examples.

Original languageEnglish
Pages (from-to)419-432
Number of pages14
JournalPhysica A: Statistical Mechanics and its Applications
Volume388
Issue number4
DOIs
StatePublished - 15 Feb 2009

Keywords

  • Leverage effect
  • Modeling
  • Stochastic volatility
  • The Itô lemma

Fingerprint

Dive into the research topics of 'A study about the existence of the leverage effect in stochastic volatility models'. Together they form a unique fingerprint.

Cite this