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Permalink: http://hdl.handle.net/1866/12853

Nonparametric estimation of the leverage effect: a trade-off between robustness and efficiency

Article [Version of Record]
Thumbnail
2015-05_cahier.pdf (667.9Kb)
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Cahier de recherche ; #2015-05
Publisher(s)
Université de Montréal. Département de sciences économiques.
2015-11-22
Author(s)
Kalnina, Ilze
Xiu, Dacheng
Keywords
  • Derivatives
  • VIX
  • Implied volatility
  • High frequency data
  • Spot correlation
Abstract(s)
We consider two new approaches to nonparametric estimation of the leverage effect. The first approach uses stock prices alone. The second approach uses the data on stock prices as well as a certain volatility instrument, such as the CBOE volatility index (VIX) or the Black-Scholes implied volatility. The theoretical justification for the instrument-based estimator relies on a certain invariance property, which can be exploited when high frequency data is available. The price-only estimator is more robust since it is valid under weaker assumptions. However, in the presence of a valid volatility instrument, the price-only estimator is inefficient as the instrument-based estimator has a faster rate of convergence. We consider two empirical applications, in which we study the relationship between the leverage effect and the debt-to-equity ratio, credit risk, and illiquidity.
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  • FAS - Département de sciences économiques - Cahiers de recherche [540]

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