Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2018 055

Estimation of the discontinuous leverage effect: Evidence from the NASDAQ order book

Markus Bibinger
Christopher Neely
Lars Winkelmann

An extensive empirical literature documents a generally negative relation, named the “leverage
effect,” between asset returns and changes of volatility. It is more challenging to establish
such a return-volatility relationship for jumps in high-frequency data. We propose new nonparametric
methods to assess and test for a discontinuous leverage effect — i.e. a covariation
between contemporaneous jumps in prices and volatility. The methods are robust to market
microstructure noise and build on a newly developed price-jump localization and estimation
procedure. Our empirical investigation of six years of transaction data from 320 NASDAQ
firms displays no unconditional negative covariation between price and volatility cojumps.
We show, however, that there is a strong and significant discontinuous leverage effect if
one conditions on the sign of price jumps and whether the price jumps are market-wide or

High-frequency data, market microstructure, news impact, market-wide jumps, price jump, volatility jump

JEL Classification:
C13, C58