Asymmetries in Stock Returns: Statistical Tests and Economic Evaluation

52 Pages Posted: 15 Jan 2004

See all articles by Yongmiao Hong

Yongmiao Hong

Cornell University - Department of Economics

Guofu Zhou

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

Jun Tu

Singapore Management University - Lee Kong Chian School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 2003

Abstract

In this paper, we provide a model-free test for asymmetric correlations which suggest stocks tend to have greater correlations with the market when the market goes down than when it goes up. We also provide such tests for asymmetric betas and covariances. In addition, we evaluate the economic significance of asymmetric correlations by answering the question that what is the utility gain for an investor who switches from a belief of symmetric stock returns into a belief of asymmetric returns. Applying our methodology to three portfolios grouped by size, Fama and French's size and book-to-market, and industry, we find that asymmetries show up in sample estimates for all the portfolios, but they are statistically ignificant primarily for small size portfolios. Nevertheless, asymmetries are of substantial economic importance for an investor who switches her symmetry belief into an asymmetric one, irrespective of the portfolios.

Suggested Citation

Hong, Yongmiao and Zhou, Guofu and Tu, Jun, Asymmetries in Stock Returns: Statistical Tests and Economic Evaluation (October 2003). Available at SSRN: https://ssrn.com/abstract=486092 or http://dx.doi.org/10.2139/ssrn.486092

Yongmiao Hong (Contact Author)

Cornell University - Department of Economics ( email )

Department of Statistical Science
414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-5130 (Phone)
607-255-2818 (Fax)

Guofu Zhou

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

Jun Tu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
#04-01
Singapore, 178899
Singapore

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