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Journal of Financial Econometrics Advance Access originally published online on May 17, 2006
Journal of Financial Econometrics 2006 4(3):353-384; doi:10.1093/jjfinec/nbj014
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© The Author 2006. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

Leverage and Volatility Feedback Effects in High-Frequency Data

Tim Bollerslev
     Duke University

Julia Litvinova
     The Brattle Group

George Tauchen
     Duke University

Address correspondence to Tim Bollerslev, Department of Economics, Duke University, Box 90097, Durham, NC 27708, or e-mail: boller{at}econ.duke.edu.

We examine the relationship between volatility and past and future returns using high-frequency aggregate equity index data. Consistent with a prolonged "leverage" effect, we find the correlations between absolute high-frequency returns and current and past high-frequency returns to be significantly negative for several days, whereas the reverse cross-correlations are generally negligible. We also find that high-frequency data may be used in more accurately assessing volatility asymmetries over longer daily return horizons. Furthermore, our analysis of several popular continuous-time stochastic volatility models clearly points to the importance of allowing for multiple latent volatility factors for satisfactorily describing the observed volatility asymmetries.

KEYWORDS: high-frequency data, leverage effect, stochastic volatility models, temporal aggregation, volatility asymmetry, volatility feedback effect

Received May 25, 2005; revised February 20, 2006; accepted March 9, 2006


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