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Select Empirical Evidence of the Leverage Effect in a Stochastic Volatility Model: A Realized Volatility Approach

Author

Listed:
  • Dinghai Xu

    (Department of Economics, University of Waterloo, Waterloo, ON N2L 3G1, Canada)

  • Yuying Li

    (School of Computer Science, University of Waterloo, Waterloo, ON N2L 3G1, Canada)

Abstract

Increasing attention has been focused on the analysis of the realized volatility, which can be treated as a proxy for the true volatility. In this paper, we study the potential use of the realized volatility as a proxy in a stochastic volatility model estimation. We estimate the leveraged stochastic volatility model using the realized volatility computed from five popular methods across six sampling-frequency transaction data (from 1-min to 60- min) based on the trust region method. Availability of the realized volatility allows us to estimate the model parameters via the MLE and thus avoids computational challenge in the high dimensional integration. Six stock indices are considered in the empirical investigation. We discover some consistent findings and interesting patterns from the empirical results. In general, the significant leverage effect is consistently detected at each sampling frequency and the volatility persistence becomes weaker at the lower sampling frequency.

Suggested Citation

  • Dinghai Xu & Yuying Li, 2012. "Select Empirical Evidence of the Leverage Effect in a Stochastic Volatility Model: A Realized Volatility Approach," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 7(1), pages 22-43, March.
    • Handle: RePEc:fec:journl:v:7:y:2012:i:1:p:22-43
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-001-012-0002-6
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    More about this item

    Keywords

    realized volatility; stochastic volatility model; leverage effect; high frequency data; MLE; trust-region method;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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