Asymmetries in Stock Returns: Statistical Tests and Economic Evaluation

Posted: 25 Jun 2008

See all articles by Yongmiao Hong

Yongmiao Hong

Cornell University - Department of Economics

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

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Abstract

We provide a model-free test for asymmetric correlations in which stocks move more often with the market when the market goes down than when it goes up, and also provide such tests for asymmetric betas and covariances. When stocks are sorted by size, book-to-market, and momentum, we find strong evidence of asymmetries for both size and momentum portfolios, but no evidence for book-to-market portfolios. Moreover, we evaluate the economic significance of incorporating asymmetries into investment decisions, and find that they can be of substantial economic importance for an investor with a disappointment aversion (DA) preference as described by Ang, Bekaert, and Liu (2005).

JEL Classification: C12, C15, C32, G12

Suggested Citation

Hong, Yongmiao and Zhou, Guofu, Asymmetries in Stock Returns: Statistical Tests and Economic Evaluation. The Review of Financial Studies, Vol. 20, No. 5, pp. 1547-1581, 2007, Available at SSRN: https://ssrn.com/abstract=1151150 or http://dx.doi.org/10.1093/rfs/hhl037

Yongmiao Hong (Contact Author)

Cornell University - Department of Economics ( email )

Department of Statistical Science
414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-5130 (Phone)
607-255-2818 (Fax)

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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