Is Asymmetric Correlation in Stock Returns Actually Asymmetric Correlations in Stock Fundamentals?

Abstract

This paper tests asymmetric correlations in the variables that may influence stock returns. We find that corporate earnings, sales, and analyst forecasts have statistically significant asymmetric correlations, indicating that the variables have larger conditional betas during negative market-wide movements. Earnings surprises are not asymmetrically correlated as analyst forecasts adjust for asymmetric correlations in stock fundamentals. Trading pressures are not asymmetrically correlated but the distribution of their conditional betas shows that trading pressures amplify both positive and negative market-wide shocks. Overall, the results suggest that asymmetric correlation in stock returns is asymmetric correlation in stock fundamentals.

Keywords: Asymmetric correlation, skewness, conditional beta, earnings, trading pressure

JEL Classification: G11, G12