On return-volatility correlation in financial dynamicsJ. Shen and B. Zheng
Zhejiang University, Zhejiang Institute of Modern Physics - Hangzhou 310027, PRC
received 14 July 2009; accepted in final form 30 September 2009; published October 2009
published online 28 October 2009
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.
89.65.Gh - Economics; econophysics, financial markets, business and management.
89.75.-k - Complex systems.
© EPLA 2009