Yacine Aït-Sahalia
Bio sketch:Yacine Aït-Sahalia is the Otto A. Hack 1903 Professor of Finance and Economics and Director of the Bendheim Center for Finance at Princeton University. Prior to joining Princeton in 1998, he was Professor of Finance at the University of Chicago Graduate School of Business, received his PhD in Economics from MIT in 1993 and is a graduate of France’s Ecole Polytechnique. He has published widely in leading academic journals and has been distinguished for research and teaching excellence. He is an elected fellow of the Institute of Mathematical Statistics, the Econometric Society and the American Statistical Association.
Abstract:The leverage effect refers to the generally negative correlation between an asset return and its changes of volatility. A natural estimate consists in using the empirical correlation between the daily returns and the changes of daily volatility estimated from high-frequency data. The puzzle lies in the fact that such an intuitively natural estimate yields nearly zero correlation for most assets tested, despite the many economic reasons for expecting the estimated correlation to be negative. To better understand the sources of the puzzle, we analyze the different asymptotic biases that are involved in high frequency estimation of the leverage effect, including biases due to discretization errors, to smoothing errors in estimating spot volatilities, to estimation error, and to market microstructure noise. This decomposition enables us to propose bias correction methods for estimating the leverage effect.
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