Noncausal AR-GARCH Model and Its Applications in Asset Pricing

32 Pages Posted: 7 Aug 2023

See all articles by Shiqing Ling

Shiqing Ling

Hong Kong University of Science & Technology (HKUST)

Zhenya Liu

Renmin University of China; CERGAM, Aix-Marseille University

Shixuan Wang

University of Reading - Department of Economics

Yaosong Zhan

Business School, Sun Yat-sen University

Date Written: August 6, 2023

Abstract

Since investors have diverse perspectives and limited information, their expectations can be subjective and prone to inaccuracies. Hence, price fluctuations are influenced by heterogeneous beliefs regarding future expectations, and both surveys and straightforward models can only partially capture the intricate nature of expectations. To address this issue, we employ a noncausal AR-GARCH model with a quasi-maximum likelihood technique to mitigate the impact of heterogeneous beliefs. Our approach allows us to determine the asymptotic distribution of estimated parameters and perform hypothesis tests. These empirical findings indicate that the error term in the US stock market is causal; in contrast, in the Chinese stock market, noncausal errors significantly impact price volatility. Furthermore, our models have the capability to discern nuanced distinctions between Brent and WTI crude oil prices, indicating that the price pattern of WTI may be more influenced by heterogeneous beliefs among market participants.

Keywords: Noncausal, GARCH Model, Asset Pricing

JEL Classification: C22, C51, G12

Suggested Citation

Ling, Shiqing and Liu, Zhenya and Wang, Shixuan and Zhan, Yaosong, Noncausal AR-GARCH Model and Its Applications in Asset Pricing (August 6, 2023). Available at SSRN: https://ssrn.com/abstract=4532837 or http://dx.doi.org/10.2139/ssrn.4532837

Shiqing Ling

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Zhenya Liu (Contact Author)

Renmin University of China ( email )

School of Finance
Beijing, Beijing 100872
China

CERGAM, Aix-Marseille University ( email )

Aix-Marseille University
3 Avenue Robert Schuman,
Aix-en-Provence, 13628
France
0781668685 (Phone)

Shixuan Wang

University of Reading - Department of Economics ( email )

Reading, RG6 6EL
United Kingdom

Yaosong Zhan

Business School, Sun Yat-sen University ( email )

Shenzhen, Guangdong
China

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