On return-volatility correlation in financial dynamics

Details On return-volatility correlation in financial dynamics On return-volatility correlation in financial dynamics

2012-02-02

arxiv.org/abs/1202.0342v1

published in EPL (Europhysics Letters), Volume 88, Issue 2, pp. 28003 (2009)

Economy

Quantitative Finance

Statistical Finance

6 pages, 4 figures

Scientific paper

10.1209/0295-5075/88/28003

With the daily and minutely data of the German DAX and Chinese indices, we investigate how the return-volatility correlation originates in financial dynamics. Based on a retarded volatility model, we may eliminate or generate the return-volatility correlation of the time series, while other characteristics, such as the probability distribution of returns and long-range time-correlation of volatilities etc., remain essentially unchanged. This suggests that the leverage effect or anti-leverage effect in financial markets arises from a kind of feedback return-volatility interactions, rather than the long-range time-correlation of volatilities and asymmetric probability distribution of returns. Further, we show that large volatilities dominate the return-volatility correlation in financial dynamics.

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