Asymmetry in Stock Comovements: An Entropy Approach
47 Pages Posted: 27 Aug 2014 Last revised: 15 Jul 2017
Date Written: June 23, 2017
We provide an entropy approach for measuring asymmetric comovement between the return on a single asset and the market return. This approach yields a model-free test for stock return asymmetry, generalizing the correlation-based test proposed by Hong, Tu, and Zhou (2007). Based on this test, we find that asymmetry is much more pervasive than previously thought. Moreover, our approach also provides an entropy-based measure of downside asymmetric comovement. In the cross-section of stock returns, we find an asymmetry premium: high downside asymmetric comovement with the market indicates higher expected returns.
Keywords: Asymmetric comovement, entropy, asset pricing
JEL Classification: C12, C15, G12
Suggested Citation: Suggested Citation