Threshold Asymmetries in Equity Return Distributions: Statistical Tests and Investment Implications

34 Pages Posted: 23 Nov 2011 Last revised: 7 Dec 2011

See all articles by Emre Yoldas

Emre Yoldas

Board of Governors of the Federal Reserve System

Date Written: September 1, 2011

Abstract

In this paper we investigate asymmetries in time-varying means, volatilities, correlations, and betas of equity returns in a multivariate threshold framework. We consider alternative specifications in which the threshold variable is based on well-established equity pricing factors and predictors. We find strong threshold effects with respect to market excess return, value premium, and term spread. Our results indicate that the threshold model based on the market excess return provides a flexible and computationally inexpensive specification for modeling asymmetries. We test significance of specific forms of asymmetries using subsampling methods. We compare performance of the proposed threshold model with a variety of alternatives in an out-ofsample setup and find that the threshold model performs remarkably well, especially for investors with relatively high risk aversion.

Keywords: Asymmetries, Threshold models, Fama-French factors, Realized Volatility, Yield Curve, Subsampling, Bootstrap, Portfolio Choice

JEL Classification: C12, C13, C32, G11

Suggested Citation

Yoldas, Emre, Threshold Asymmetries in Equity Return Distributions: Statistical Tests and Investment Implications (September 1, 2011). Studies in Nonlinear Dynamics and Econometrics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1963221

Emre Yoldas (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

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