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Return-volatility correlation in financial dynamics.

T Qiu1, B Zheng, F Ren

  • 1Zhejiang University, Zhejiang Institute of Modern Physics, Hangzhou 310027, People's Republic of China.

Physical Review. E, Statistical, Nonlinear, and Soft Matter Physics
|August 16, 2006
PubMed
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This study reveals distinct return-volatility correlations in German DAX and Chinese stock indices. A leverage effect is observed in the German DAX, contrasting with anantileverage effect in Chinese indices.

Area of Science:

  • * Financial econometrics
  • * Time series analysis
  • * Market microstructure

Background:

  • * Understanding the relationship between asset returns and volatility is crucial for financial risk management.
  • * Previous research has shown mixed results regarding the return-volatility correlation, often termed the leverage effect.
  • * The influence of market-specific characteristics and data frequency on this correlation requires further investigation.

Purpose of the Study:

  • * To investigate the local and nonlocal return-volatility correlation in German DAX and Chinese stock indices.
  • * To analyze the impact of different data frequencies (daily and minutely) on these correlations.
  • * To explore the asymmetric properties of financial indices in both positive and negative time directions.

Main Methods:

Related Experiment Videos

  • * Analysis of daily and minutely price data for the German DAX and Chinese stock indices.
  • * Application of time series econometric models to capture local and nonlocal correlations.
  • * Examination of correlations in both forward (return-volatility) and backward (volatility-return) time directions.

Main Results:

  • * A significant leverage effect was observed for the German DAX, indicating higher volatility following negative returns.
  • * Chinese indices exhibited anantileverage effect, with higher volatility associated with positive returns.
  • * Anantileverage effect was detected nonlocal in time for both German DAX and Chinese indices in the negative time direction (volatility-return correlation).
  • * The local in-time volatility-return correlation did not show a consistent pattern across indices.

Conclusions:

  • * The findings highlight significant differences in return-volatility dynamics between German and Chinese equity markets.
  • * The observed asymmetric properties suggest that a retarded volatility model could potentially describe the behavior of these financial indices.
  • * Further research is warranted to explore the underlying mechanisms driving these market-specific effects.