Financial Asset Returns, Direction-of-Change Forecasting, and Volatility Dynamics

41 Pages Posted: 19 Apr 2004

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 15, 2004

Abstract

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

Christoffersen, Peter and Diebold, Francis X., Financial Asset Returns, Direction-of-Change Forecasting, and Volatility Dynamics (March 15, 2004). PIER Working Paper No. 04-009; EFA 2004 Maastricht Meetings Paper No. 4809. Available at SSRN: https://ssrn.com/abstract=523582 or http://dx.doi.org/10.2139/ssrn.523582

Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

Copenhagen Business School

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Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES

School of Economics and Management
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DK-8000 Aarhus C
Denmark

Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1507 (Phone)
215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

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