Gain/loss asymmetry in time series of individual stock prices and its relationship to the leverage effect

TL;DR

This paper demonstrates that gain/loss asymmetry observed in stock indices also exists in individual stocks and is closely related to the leverage effect, with models showing a shared governing parameter.

Contribution

It establishes the presence of gain/loss asymmetry in individual stocks and links it to the leverage effect through model analysis.

Findings

Gain/loss asymmetry is present in individual stocks.

The same parameter influences both leverage effect and gain/loss asymmetry.

Models show a close relationship between the two phenomena.

Abstract

Previous research has shown that for stock indices, the most likely time until a return of a particular size has been observed is longer for gains than for losses. We establish that this so-called gain/loss asymmetry is present also for individual stocks and show that the phenomenon is closely linked to the well-known leverage effect -- in the EGARCH model and a modified retarded volatility model, the same parameter that governs the magnitude of the leverage effect also governs the gain/loss asymmetry.