Abstract: It is found the empirical evidence in China stock market that the dependence structure between the asset's return and its volatility measured by realized volatility, so-called the leverage effect, have a special correlation pattern in terms of local correlation, which is not consistent with that implied by typical leverage effect assumption,but consistent with the findings about American equity market in Chen and Ghysels (2011). The distortion mixture method of Li et al. (2014) is employed to construct Copulas to capture the tail dependence in real data, and tailor the quadratic distortion functions by truncation to mitigate the confounding of the components Copula in the mixture. The closeness of the local correlation pattern of the estimated local correlations using simulated data from the constructed Copulas to that of real data shows that the Copulas proposed in this paper capture the correlation features in real data well, and the nonparametric goodness-of-fit test confirms the validity of the Copula further.

Key words: leverage effect, realized volatility, copula, local correlationship