The Extended DSSW Model And Leverage Effect Of Volatility In Stock Market

Noise trading model is built by Delong in1990, and is concerned by academics. Their academicdevelopment of the theory solves many financial visions. Later scholars extended the model to anindefinite model that better explain the role of reality.The volatility of the stock market has been a hot spot in financial market. The forecasting of theconditional volatility is very important to risk management. The Extended GARCH model–EGARCH (Nelson) is veryuseful to analyze the “leverage effect” in stock market.There are many arguments about the interpretation of the “leverage effect”. However, thisarticle would apply the noise trading model to analyze the leverage effect of volatility in stock marketand come to a new explanation.In this paper, we expand the DSSW model and change some original assumptions. Certainly,in the long run, the change would have little impact on the final asset price, but it can explain theshort volatility and the diversification of the conditional asset price. In the empirical analysis, we usethe EGARCH model to research the New York stock exchange index and the result show that whenthe proportion of rational traders is low, the leverage effect of the stock market is small, which the"bad news" for the impact of market is more volatile than "good news". As the proportion of rationaltraders significantly increased, the degree of leverage would also grow.So, it is reasonable that in China which the turnover of stock market is extraordinarily high,filled with a lot of noise traders, there is no significant leverage effect or reverse leverage effect. Butas the market improvement, the rational investors would gradually grow and the leverage would alsobe approximately obvious.