Title: Estimation of the discontinuous leverage effect: Evidence from the NASDAQ order book,
Abstract: An extensive empirical literature documents a generally negative correlation,
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 relation 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
correlation between price and volatility cojumps. We show, however, that there
is a strong relation between price-volatility cojumps if one conditions on the
sign of price jumps and whether the price jumps are market-wide or
idiosyncratic. Firms' volatility levels strongly explain the cross-section of
discontinuous leverage while debt-to-equity ratios have no significant
explanatory power.