Asymmetry Of Returns Research Articles

Asset Pricing with Return Asymmetries: Theory and Tests

I derive an equilibrium asset pricing model incorporating both systematic and idiosyncratic return asymmetries, and show their respective impact on expected returns. With systematic return asymmetry, investors allocate their wealth between the risk-free security, the market portfolio, and a factor which overweights assets with high systematic asymmetry. Investors who prefer positive asymmetry remain underdiversified from a mean-variance perspective to preserve skewness in their portfolio, and idiosyncratic asymmetry therefore is priced in equilibrium. I find that a systematic asymmetry factor and a factor capturing idiosyncratic asymmetry help explain the cross-sectional variation of expected returns across U.S. equities, international equity markets, government bonds, currencies, and commodities. My results offer a risk-based explanation of expected returns that contributes to our understanding of asset pricing across multiple markets.

Higher moments and beta asymmetry: evidence from Australia

AbstractWe examine whether systematic higher moments capture beta asymmetry in an asset pricing model whereby the conditional beta of a risky asset increases (decreases) during a bear (bull) market state. We first provide a simple conceptual outline from the microeconomic literature to show that beta asymmetry is driven by time‐varying higher‐order risk preferences (prudence and temperance) across different market states. We then empirically relate these higher‐order risk preferences to systematic skewness and systematic kurtosis. We find that beta asymmetry in Australian stock returns cannot be explained by Carhart (1997) 4‐factor model but is subsumed by systematic higher moments.

Asymmetry in government bond returns

Is there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables? To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modeling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future.

Asymmetry in Government Bond Returns

Is there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables? To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modelling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future.

Asymmetry in Government Bond Returns

Is there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables? To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modelling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future.

Asymmetry in Government Bond Returns

Is there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables? To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modelling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future.

SDF-based estimation of linear factor models with alternative loss functions

Hansen and Jagannathan (1997) introduce a measure of model misspecification which is based on the L2-norm and which has been wildly used in recent years in order to estimate the parameters of linear factor models. Given the observed asymmetry and excess kurtosis of financial returns, this paper introduces two alternative estimation methods which follow the same approach but replace its loss function. The first one is based on the absolute value of the corresponding deviations while the second one uses a gain-loss ratio-based loss function. We show how these two estimation methods can be implemented by means of simple linear programming and Monte Carlo simulations are undertaken to assess the relative performance of all three methods under varying distributional assumptions. Our results show a promising behaviour of the gain-loss ratio-based estimates and they also emphasise the important gains that may be accomplished by using positivity constraints on the model’s associated stochastic discount factor.

Empirical Case Study of Binary Options Trading

This paper presents an interdisciplinary application of information & communication methodology to financial economics. The empirical case study reported in this contribution consists of a preliminary example of binary options stock trading. The authors have investigated the performance of a simple algorithm which includes one buy/sell order per week. They have analyzed real sets of historical stock quotes, evidencing the asymmetry of achievable economic returns. In fact, the devised algorithm has denoted a (simulated) overall trading gain in the 87% of cases. A discussion, correlating such trend to the typical behavior of occasional traders, is finally reported

Higher-Moment Asset Pricing and Allocation in a Heterogeneous Market Equilibrium

Investors have different preferences for portfolio skewness and kurtosis, i.e. return asymmetry and tail fatness. We build up a new equilibrium model with three types of investors whose preferences can be characterized by MV, MVS and MVSK. (M: Mean V: Variance S: Skewness K: Kurtosis) and they are named as Traditional, and investor, correspondingly. We study how the heterogeneous preferences can impact equilibrium asset return and optimal allocation. In addition, we investigate how the change of investor proportion on the market influences the equilibrium properties. Furthermore, by using the weekly world stock market indices (MSCI) ranging from January 1988 till January 2010, we are able to recover the investor composition in the bullish and bearish markets. We find that during Dotcom crash and Subprime crisis, there are more Traditional and Lotto investors than Kurtosis Aversion investors existing on the market; during Dotcom boom, Traditional and Kurtosis Aversion investors are the majority; in Housing boom, most of the investors are the Lotto investors. To our best knowledge, we are the first to investigate this problem in a partial equilibrium setting and the model prediction is supported by the empirical evidence.

Non-Gaussian diversification: When size matters

Classical portfolio theory informs investors that they should have a large number of assets in their portfolios in order to diversify risk. We show that the non-Gaussian features of stock return distribution may not allow for this risk protection in times of crisis. Moreover, we demonstrate empirically that, if investors are risk-averse and consider higher order moments, they have numerous incentives not to diversify their portfolios fully. This is caused by the evolution of both large losses and asymmetry of returns when the numbers of assets in a portfolio change.

Short Arbitrage, Return Asymmetry, and the Accrual Anomaly

Short Arbitrage, Return Asymmetry, and the Accrual Anomaly

A conditional variance tale from an emerging economy's freely floating exchange rate

This article studies daily return and volatility dynamics in the exchange rate of an emerging market economy Turkey over the recent floating period. We use Generalized Autoregressive Conditional Heteroscedastic (GARCH) and Fractionally Integrated GARCH (FIGARCH) models with various error distributions. Findings show that a parsimonious FIGARCH model with an asymmetric error distribution characterizes the daily Turkish Lira (TL) returns against US dollar and euro considerably well. We find statistically significant asymmetry and peakedness in conditional returns and time-varying volatility with long-range dependence in conditional volatility. Long memory finding is robust to different specifications for the conditional returns as well as possible shifts in the return and volatility dynamics over sub-periods. Results in the article show that despite the decline in volatility over the course of the recent float, TL returns are still wild compared to developed economies exchange rates during the same period. Findings have implications for exchange rate regime choice, policy and risk management in Turkey and other emerging market economies.

Firm Size Transmission Effect and Price-Volume Relationship Analysis During Financial Tsunami Periods

Investors attend importance to forecast the price of financial assets, thus, the factors affecting the stock price are usually the focus of financial research in the field, in which the most important factors to scholars are firm size transmission effect and price-volume relationship. In this study, the analysis of these two items in the Taiwan stock market is conducted. The results indicate that the firm size transmission effect is almost significant, and the reversal phenomenon also exists. However, before the financial tsunami, the firm size transmission effect does not significantly exist; this result also indirectly proves the directional asymmetry of the market returns, proposed by McQueen, Pinegar, and Thorley (1996). For price and volume relationship, big cap index reveals that volume leads to price before the financial tsunami, and small cap index appears that price leads to volume in 2010.

Short Arbitrage, Return Asymmetry, and the Accrual Anomaly

We find a positive association between short-selling and accruals during 1988-2003. Short arbitrage occurs primarily among firms in the top accrual decile, and firms with sufficiently high supply of loanable shares (proxied by institutional holdings). Consistent with limits to short arbitrage, there is an asymmetry between the up- and down- sides of the accrual anomaly. Asymmetry is only present on NASDAQ, and is significantly stronger among firms with low institutional holdings, low liquidity (turnover and size), and high residual volatility. Thus, there is short arbitrage of the accrual anomaly, but short sale constraints limit its effectiveness.

Conditional Skewness of Stock Market Returns in Developed and Emerging Markets and its Economic Fundamentals

We propose a quantile-based measure of conditional skewness, particularly suitable for handling recalcitrant emerging market returns. The skewness of international stock market returns varies significantly across countries over time, and persists at long horizons. In emerging markets, skewness is mostly positive and idiosyncratic, and significantly relates to a country's financial and trade openness and balance of payments. In an international portfolio setting, return asymmetry leads to sizeable certainty-equivalent gains and increases the weight on emerging countries to about 30%. Investing in emerging markets seems to be about expectations of a higher upside than downside, consistent with recent theories.

THE RELATIONSHIP BETWEEN TOCK RETURN ASYMMETRIES AND CORPORATE GOVERNANCE: AN EMPIRICAL WORK ON THE TURKISH CASE

In this paper, we investigate the relationship between stock return asymmetries, i.e. stock market return volatility and corporate governance by using the data of selected companies listed on Istanbul Stock Exchange (ISE) and we test the hypothesis whether there is a correlation between the quality of corporate governance, concentration of ownership and the positive skewness of ISE listed company returns. We discuss our findings that positive skewness is most profound in stock market returns for companies that have poor corporate governance. In addition, companies with more concentrated ownership also have greater positive skewness. That is, if a company’s ownership is more concentrated, it is more likely that managers have more discretionary power to disclose information, which induces more positive skewness. We find that our results are consistent with some of theoretical models in the literature and also our results are robust to different measures of return asymmetries and to alternative measures of corporate governance.

A Non-Stationary Approach for Financial Returns with Nonparametric Heteroscedasticity

A non-stationary regression model for financial returns is examined theoretically. Volatility dynamics are modeled by nonparametric curve estimation on equidistant return vectors. We prove consistency and asymptotic normality of symmetric estimators and of one-sided estimators for variances and covariance matrices analytically, and derive remarks on kernels and bandwidths. Further attention is paid to asymmetry and heavy tails of returns, captured by an asymmetric Pearson type VII distribution for random residuals. Using a method of moments for its parameter estimation and a Student-t connection, a factor-based VaR implementation is derived. The approximation quality of the non-stationary approach is supported by simulation studies.

Modelling skewness and elongation in financial returns: the case of exchange-traded funds

Recent studies have documented the importance of asymmetry and tail-fatness of returns on portfolio-choice, asset-pricing, value-at-risk and option-valuation models. This article explores the nature of skewness and elongation in daily Exchange-traded Fund (ETF) return distributions using g, h and (g × h) distributions. These exploratory data analytic techniques of Tukey (1977) reveal patterns that are hidden from a cursory glance at conventional measures for skewness and elongation. The g, h and (g × h) distributions provide parameter estimates that indicate substantial variation in skewness and elongation for individual ETFs; nonetheless, some trends are discovered when the funds are grouped by fund size and style of investing. Monte Carlo simulations suggest that these exploratory techniques are able to capture patterns found in commonly used Generalized Autoregressive Conditional Heteroskedasticity (GARCH) family of models.

Education Gender Gaps in Pakistan: Is the Labor Market to Blame?

Abstract Differential labor market returns to male and female education are one potential explanation for large gender gaps in education in Pakistan. We empirically test this explanation by estimating private returns to education separately for male and female wage earners. This article contributes to the literature by using a variety of methodologies (ordinary least squares, Heckman correction, two‐stage least squares, and household fixed effects) in order to estimate economic returns to education. The latest nationally representative data—the Pakistan Integrated Household Survey (2002)—are used. Earnings function estimates consistently reveal a sizable gender asymmetry in economic returns to education, with returns to women’s education being substantially and statistically significantly higher than men’s. The return to an additional year of schooling ranges between 7% and 11% for men and between 13% and 18% for women. There are also large, direct returns to women’s education at low levels of schooling, ...

Financial Disclosure and Speculative Bubbles: An International Test of Asymmetry

This paper applies two tests of asymmetry to examine if the quality of a country's financial disclosure system affects the likelihood of speculative bubbles. We examine the hypothesis that stock prices of firms in countries with a low level of financial disclsoure are more likely to experience bubbles. The countries, ranked in order of disclosure levels, are the United States, Canada, the United Kingdom, the Netherlands, France, Japan, Germany, and Switzerland (Saudagaran and Biddle (1992)). The findings based on the third-order Markov chain test suggest the presence of asymmetry in dollar-denominated quarterly real returns of Japan, a country with a relatively low level of disclosure. The asymmetric pattern is due to the non-random walk return pattern of Japan. The results based on the time reversibility test indicate that monthly real returns in both dollar-denominated and local currencies of Germany increase slower than they decrease. Such slow-up and fast-down dynamic is consistent with the presence of a bubble.