Asymmetry in Stock Comovements: An Entropy Approach

47 Pages Posted: 27 Aug 2014 Last revised: 15 Jul 2017

See all articles by Lei Jiang

Lei Jiang

Tsinghua University

Ke Wu

Renmin University of China

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Date Written: June 23, 2017

Abstract

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

Jiang, Lei and Wu, Ke and Zhou, Guofu, Asymmetry in Stock Comovements: An Entropy Approach (June 23, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2487432 or http://dx.doi.org/10.2139/ssrn.2487432

Lei Jiang

Tsinghua University ( email )

Beijing, 100084
China

Ke Wu

Renmin University of China ( email )

59 Zhongguancun Street
Beijing, 100872
China

Guofu Zhou (Contact Author)

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/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

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