Returns and Volatility Asymmetries in Global Stock Markets

35 Pages Posted: 13 Jul 2002

See all articles by Thomas Chinan Chiang

Thomas Chinan Chiang

Drexel University - Department of Finance

Cathy W. S. Chen

Feng Chia University - Department of Statistics; Graduate Institute of Statistics & Actuarial Science, Feng Chia University

Mike K. P. So

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics & Operations Management

Date Written: August 14, 2002

Abstract

This paper examines the hypothesis that both stock returns and volatility are asymmetrical functions of past information derived from domestic and US stock market news. By employing a double-threshold regression GARCH model to investigate four major index return series, we find significant evidence to sustain the asymmetrical hypothesis of stock returns. Specifically, evidence strongly supports the hypothesis that stock index returns are positively correlated with a composite of stock return news, which is obtained by a weighted average of the lagged domestic and US stock index returns. Moreover, we find that negative news will cause a larger decline in a national stock return than will an equal magnitude of good news. This also holds true for the conditional variance. The variance appears to be more volatile and persistent when bad news hits the market than when good news does. Consistent with existing literature, asymmetries in stock returns are not independent of asymmetries in volatility since a larger adjustment in stock prices to bad news is likely to cause domestic investors to change the debt-equity ratio, leading to higher volatility in stock market.

Keywords: Asymmetry, Threshold GARCH, Stock returns, Volatility, Bayesian Estimation

JEL Classification: C15, C32, C51

Suggested Citation

Chiang, Thomas C. and Chen, Cathy W. S. and So, Mike K.P., Returns and Volatility Asymmetries in Global Stock Markets (August 14, 2002). EFA 2002 Berlin Meetings Discussion Paper. Available at SSRN: https://ssrn.com/abstract=319010 or http://dx.doi.org/10.2139/ssrn.319010

Thomas C. Chiang (Contact Author)

Drexel University - Department of Finance ( email )

32nd & Chestnut Streets
Philadelphia, PA 19104
United States
215-895-1745 (Phone)

Cathy W. S. Chen

Feng Chia University - Department of Statistics ( email )

100 Wen Hwa Road
Taichung, 407
Taiwan
886 4 24517250 ext 4412 (Phone)
886 4 24517092 (Fax)

HOME PAGE: http://myweb.fcu.edu.tw/~chenws/

Graduate Institute of Statistics & Actuarial Science, Feng Chia University

100 Wenhwa Road
Talchung
Taiwan
886 4-24517250 ext 4412 (Phone)
886 4-2517092 (Fax)

HOME PAGE: http://myweb.fcu.edu.tw/~chenws/

Mike K.P. So

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics & Operations Management ( email )

Clear Water Bay, Kowloon
Hong Kong

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