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Does the Financial Leverage Effect Depend on Volatility Regimes?

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  • Chon, Sora
  • Kim, Jaeho

Abstract

This paper investigates how the financial leverage effect changes across different volatility regimes. To test for regime dependency in the leverage effect, we introduce a new regime switching stochastic volatility model and apply the model to daily Standard and Poor’s 500 and NASDAQ return data. Our empirical analysis that uses Bayesian inference reveals that the leverage effect is reinforced when financial markets enter into high or medium-high volatility regimes.

Suggested Citation

  • Chon, Sora & Kim, Jaeho, 2021. "Does the Financial Leverage Effect Depend on Volatility Regimes?," Finance Research Letters, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:finlet:v:39:y:2021:i:c:s1544612320301872
    DOI: 10.1016/j.frl.2020.101600
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    References listed on IDEAS

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    More about this item

    Keywords

    Regime switching; Stochastic volatility; Leverage effect;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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