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Leverage vs. Feedback: Which Effect Drives the Equity Market during Stress Periods?

Aboura, Sofiane (2015), Leverage vs. Feedback: Which Effect Drives the Equity Market during Stress Periods?, Annals of economics and statistics, 119-120, p. 269-288. 10.15609/annaeconstat2009.119-120.269

Type
Article accepté pour publication ou publié
Date
2015-12
Journal name
Annals of economics and statistics
Number
119-120
Publisher
GENES
Pages
269-288
Publication identifier
10.15609/annaeconstat2009.119-120.269
Metadata
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Author(s)
Aboura, Sofiane
Dauphine Recherches en Management [DRM]
Abstract (EN)
Asymmetric volatility occupies a central role in the risk-return relation. However, this asymmetry has not been examined during stress periods. This article fills this gap by studying this relation at the tail distribution level with an empirical test on the French market from the creation of the implied volatility index in October 1997 until January 2013. Using a complete set of econometrical analysis before applying the multivariate extreme value theory, this article shows that the asymptotic dependence occurs only for the crash scenario in which the feedback effect dominates the leverage effect. This result has implications on the pricing and hedging of options contracts.
Subjects / Keywords
Risk Management; Volatility; Extreme Value Theory; Leverage Effect; Feedback Effect
JEL
C40 - General
G13 - Contingent Pricing; Futures Pricing
G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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