Abstract
AbstractA time-varying model of equity returns consisting of a volatility factor with time-varying loading, is specified to investigate the dynamical effects of shocks on expected returns. The proposed specification yields a nonlinear relationship between the conditional mean and the news, referred to as the mean impact curve (MIC). Applying this framework to the AORD, Hang Seng and Straits Times equity indexes yields estimated MICs with qualitatively similar nonlinear characteristics for each equity market. An important implication of the empirical results is that the relationship between the conditional mean and the news is found to be dependent upon the size of the shock, a result which is consistent with equity markets displaying mean aversion over short horizons and mean reversion over long horizons.
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