Scandinavian Working Papers in Economics

Working Papers,
Örebro University, School of Business

No 2021:14: A dynamic leverage stochastic volatility model

Hoang Nguyen (), Trong-Nghia Nguyen () and Minh-Ngoc Tran ()
Additional contact information
Hoang Nguyen: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Trong-Nghia Nguyen: The University of Sydney Business School, Postal: The University of Sydney Business School, Abercrombie Building H70, Corner Abercrombie Street and, Codrington St, Darlington NSW 2006, Australia.
Minh-Ngoc Tran: The University of Sydney Business School, Postal: The University of Sydney Business School, Abercrombie Building H70, Corner Abercrombie Street and, Codrington St, Darlington NSW 2006, Australia.,

Abstract: Stock returns are considered as a convolution of two random processes that are the return innovation and the volatility innovation. The correlation of these two processes tends to be negative which is the so-called leverage effect. In this study, we propose a dynamic leverage stochastic volatility (DLSV) model where the correlation structure between the return innovation and the volatility innovation is assumed to follow a generalized autoregressive score (GAS) process. We founnd that the leverage effect is reinforced in the market downturn period and weakened in the market upturn period.

Keywords: Dynamic leverage; GAS; stochastic volatility (SV)

JEL-codes: C11; C52; C58

14 pages, May 20, 2021

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