Returns and Volatility Asymmetries in Global Stock Markets
35 Pages Posted: 13 Jul 2002
Date Written: August 14, 2002
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: Suggested Citation