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J. Risk Financial Manag. 2018, 11(2), 29; https://doi.org/10.3390/jrfm11020029

Leverage and Volatility Feedback Effects and Conditional Dependence Index: A Nonparametric Study

1,* and 2
1
Department of Economics and Finance, University of Guelph, Guelph, ON N1G2W1, Canada
2
Department of Agricultural Economics, Texas A&M University, College Station, TX 77843, USA
*
Author to whom correspondence should be addressed.
Received: 5 April 2018 / Revised: 30 May 2018 / Accepted: 4 June 2018 / Published: 8 June 2018
(This article belongs to the Special Issue Nonparametric Econometric Methods and Application)
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Abstract

This paper studies the contemporaneous relationship between S&P 500 index returns and log-increments of the market volatility index (VIX) via a nonparametric copula method. Specifically, we propose a conditional dependence index to investigate how the dependence between the two series varies across different segments of the market return distribution. We find that: (a) the two series exhibit strong, negative, extreme tail dependence; (b) the negative dependence is stronger in extreme bearish markets than in extreme bullish markets; (c) the dependence gradually weakens as the market return moves toward the center of its distribution, or in quiet markets. The unique dependence structure supports the VIX as a barometer of markets’ mood in general. Moreover, applying the proposed method to the S&P 500 returns and the implied variance (VIX2), we find that the nonparametric leverage effect is much stronger than the nonparametric volatility feedback effect, although, in general, both effects are weaker than the dependence relation between the market returns and the log-increments of the VIX. View Full-Text
Keywords: conditional dependence index; Kendall’s tau; leverage effect; nonparametric copula; tail dependence index; volatility feedback effect conditional dependence index; Kendall’s tau; leverage effect; nonparametric copula; tail dependence index; volatility feedback effect
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Sun, Y.; Wu, X. Leverage and Volatility Feedback Effects and Conditional Dependence Index: A Nonparametric Study. J. Risk Financial Manag. 2018, 11, 29.

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