Black (1972, Journal of Business) suggests that volatilities and asset returns are negatively correlated, naming this phenomenon the leverage effect. Falling stock prices imply an increased leverage on firms, worsening the debt/equity ratio (and bringing the firm closer to default). Thus, agents presume investing in the firm to be riskier, resulting in volatility. Increasing volatility, on the other hand, also makes investments riskier, and prices should fall in order to reflect this. The leverage effect is also referred to in the literature as the Fisher-Black effect.

Stochastic volatility models explicitely model the leverage effect by assuming a dependence (a negative correlation) between the price and the volatility innovations. Garch models attempt to capture this effect by introducing asymmetric responces of the volatility to positive and negative return shocks.

What links here?

Got a question?

A short note

''To stop bots posting Viagra adverts as comments I have put a password in place. It just reads AEKARA, which you can use to edit the pages on this site. Sorry for any inconvenience but it was getting a real pain.

Comments^(add/edit)

aadycoihwghvvyxuythv, http://www.couragevow.com/ Propecia, lKVoAZE.