Testing for leverage effects in the returns of US equities

Abstract : This article questions the empirical usefulness of leverage effects to forecast the dynamics of equity returns. In sample, we consistently find a significant but limited contribution of leverage effects over the past 25 years of S&P 500 returns. From an out-of-sample forecasting perspective and using a variety of different models, we find no statistical or economical value in using leverage effects, provided that an asymmetric and fat-tailed conditional distribution is used. This conclusion holds both at the index level and for 70% of the individual stocks constituents of the equity index.
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Contributor : Dominique Guégan <>
Submitted on : Friday, November 9, 2018 - 3:22:49 PM
Last modification on : Tuesday, August 6, 2019 - 4:08:04 PM

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Christophe Chorro, Dominique Guegan, Florian Ielpo, Hanjarivo Lalaharison. Testing for leverage effects in the returns of US equities. Journal of Empirical Finance, Elsevier, 2018, 48, pp.290-306. ⟨https://doi.org/10.1016/j.jempfin.2018.07.008⟩. ⟨10.1016/j.jempfin.2018.07.008⟩. ⟨halshs-01917590⟩

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