Financial Asset Returns, Direction-of-Change Forecasting, and Volatility Dynamics
41 Pages Posted: 19 Apr 2004
Date Written: March 15, 2004
We consider three sets of phenomena that feature prominently - and separately - in the financial economics literature: conditional mean dependence (or lack thereof) in asset returns, dependence (and hence forecastability) in asset return signs, and dependence (and hence forecastability) in asset return volatilities. We show that: Volatility dependence produces sign dependence, long as expected returns are nonzero; sign dependence is not likely to be found via traditional market timing tests; sign dependence is not likely to be found in very high-frequency or very low-frequency returns; sign dependence is very much present in monthly U.S. equity returns, and its properties match closely our theoretical predictions.
Note: An updated version of this abstract can be found at: http://ssrn.com/abstract=908317
Keywords: Conditional Mean Dependence, Conditional Volatility
JEL Classification: C22, C53
Suggested Citation: Suggested Citation