Asymmetric Covariance, Volatility, and the Effect of News

Posted: 25 Jan 2004

See all articles by Warren G. Dean

Warren G. Dean

Monash University - Department of Accounting

Robert W. Faff

University of Queensland

Abstract

We propose that covariance (rather than beta) asymmetry provides a superior framework for examining issues related to changing risk premiums. Accordingly, we investigate whether the conditional covariance between stock and market returns is asymmetric in response to good and bad news. Our model of conditional covariance accommodates both the sign and magnitude of return innovations, and we find significant covariance asymmetry that can explain, at least in part, the volatility feedback of stock returns. Our findings are consistent across firm size, firm leverage, and temporal and cross-sectional aggregations.

Keywords: Covariance, beta, volatility feedback

JEL Classification: G12

Suggested Citation

Dean, Warren G. and Faff, Robert W., Asymmetric Covariance, Volatility, and the Effect of News. Journal of Financial Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=488928

Warren G. Dean

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Robert W. Faff (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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