Modelling the Efficiency of Equity Markets: Asymmetric Response to Price Innovations
20 Pages Posted: 25 Feb 2005 Last revised: 16 Aug 2008
Date Written: December 1, 2004
This paper links and extends the time series and price innovation literature by introducing empirical models that allow the conditional mean and variance of returns to vary asymmetrically in response to price innovations of all sizes. There is strong evidence, from both the US and UK markets, that conditional returns do depend on previous price innovations. The models developed also allow a number of well-known hypotheses concerning the equity markets to be examined. In broad terms we find support for the leverage effect, the existence of time varying risk premiums and for the supposition that the market tends to overreact to large price innovations.
Keywords: Equities, Asymmetric response, GARCH
JEL Classification: G10
Suggested Citation: Suggested Citation