Modelling the Efficiency of Equity Markets: Asymmetric Response to Price Innovations

20 Pages Posted: 25 Feb 2005 Last revised: 16 Aug 2008

See all articles by Robert Hudson

Robert Hudson

Hull University Business School (HUBS)

Christina V. Atanasova

Simon Fraser University

Date Written: December 1, 2004

Abstract

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

Hudson, Robert and Atanasova, Christina V., Modelling the Efficiency of Equity Markets: Asymmetric Response to Price Innovations (December 1, 2004). Available at SSRN: https://ssrn.com/abstract=673102 or http://dx.doi.org/10.2139/ssrn.673102

Robert Hudson

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

Christina V. Atanasova (Contact Author)

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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